Category Archives: Jay Clayton

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Crypto Pioneers Attack SEC over Regulation in Joint Letter

A group of crypto pioneers has laid out concerns about the regulation of cryptocurrencies to the US Securities and Exchanges Commission (SEC), outlining caution that further regulations passed could be detrimental to the industry as a whole.

The news of this letter to the SEC follows another written last week by the US Congress in which they asked for more clarity on cryptocurrency security. Congress also said that they believed that cryptocurrency important for many sectors of the US economy and that the SEC’s view that all cryptos are securities, besides Bitcoin and Ethereum, is leading to an exodus of crypto and blockchain companies and talent from the United States.

This latest letter from the industry itself against intrusive regulation is sure to put added pressure on the SEC to find a solution which is suitable to all. A major warning to the SEC was about the very nature of cryptocurrency which is that it was designed to be held by a third party, rather the individual, and any future regulation would need to keep this in mind.

The letter was a crypto who’s who cosignatory document including dotcom veteran Christopher Allen, Bitcoin core developer Bryan Bishop, financial expert Angus Champion de Crespigny, blockchain attorney Gavin Fearey and Caitlin Long, most recently Morgan Stanley’s managing director.

The letter explained that cryptocurrencies shouldn’t be type-cast due to their unique qualities and as such warned that “fitting them into existing market infrastructure introduces risks to investors that would not otherwise exist”.T he letter also warned against “applying rules to digital assets in ways which do not reflect their strengths”.

Earlier in June, SEC Chairman Jay Clayton clarified that the regulators had no intention of changing their traditional regulatory approach. He said:

“We are not going to do any violence to the traditional definition of a security that has worked for a long time. We’ve been doing this a long time. There’s no need to change the definition.”

Clayton was referencing a Supreme Court ruling from 1946 which defines a security as an investment of money in a common enterprise, in which the investor expects profits from others’ efforts. Those in the crypto industry have always maintained that cryptocurrencies, tokens, and ICOs, as assets rather than securities, need further legal definition.

 

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Congress Requests SEC Clarify Crypto Security Laws to Support Innovation

The United States Congress has sent a letter to the Securities and Exchange Commission (SEC) requesting that the agency clarify crypto security guidelines, to support innovation and to lessen the increasingly tense mood in the crypto space caused by widespread crackdowns led by the SEC.

Congress says they believe crypto is important for many sectors of the United States economy, and that the SEC’s view that all cryptos are securities, besides Bitcoin and Ethereum, is leading to an exodus of crypto and blockchain companies and talent from the United States. Congress is concerned that the United States will fall behind in the crypto and financial technology sectors due to the SEC’s behavior, explicitly stating that the SEC is inhibiting innovation by using law enforcement instead of making the rules better and easier to understand. Congress explicitly demands the SEC clarify guidelines by making them more articulate and improving them.

Currently, the SEC’s definition of a security cryptocurrency is any crypto which is purchased by investors from a centralized organization with the expectations of profits from their investments. Congress believes this classification is too broad since it basically includes all cryptos besides perhaps Bitcoin and Ethereum as security within that definition. Congress is asking the SEC to expand on its definition of crypto securities and to reference the Securities Act and Howey Test in its response. Furthermore, Congress wants the SEC to create easy to understand educational materials, like FAQs and examples, so crypto users aren’t confused.

Congress wants the SEC to create new guidelines to clarify how a crypto can transition from a security to a non-security due to decentralization, which is what happened with Ethereum. There are probably several cryptos launched with initial coin offerings (ICOs) that are sufficiently decentralized to not be considered securities that would still be called securities by the SEC due to the broad definition that is currently in place.

In the letter, Congress gives a shout out to SEC Commissioner Hester Peirce, who has stood up for crypto rights, unlike other SEC commissioners. Some people in the crypto space have labeled her ‘crypto mom’ for her nurturing attitude towards crypto.

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Philippine SEC Shares Draft ICO Regulations

The Philippine Securities and Exchange Commission (SEC) has released a report detailing the country’s proposed initial coin offering (ICO) regulatory guidelines.

The 37-page document released by the SEC reportedly comes after consultancy with several Philippine cryptocurrency companies, including Satoshi Citadel Industries and Coins.ph.

The proposed rules would require Philippines-based startups and corporations to file applications with the SEC detailing the function of the tokens and the business operations of the company. Prior to receiving the go-ahead to hold an ICO, companies would be required to submit an initial assessment request that follows the rules of the Commission within 90 days before the beginning of the token pre-sale.

The white paper, including an operations manual detailing the system’s structure, must also be submitted, alongside the evaluation of an independent legal counsel in evidence that the tokens do not meet the requirements necessary to be registered as securities with the SEC. The proposal goes so far as to request source codes and commands in attempts to expose potential scammers.

Further to receiving approval, advisers and members of the company holding the ICO are required to undergo police clearances to show they are of ”good repute“. The report offers nine instances that a team member could disqualify the ICO, including if they are found to have made any false statements regarding the project during the process, or if they have ever been convicted of offenses including embezzlement, misappropriation, or perjury.

To combat any illicit activities of investors in the ICO, know-your-customer and anti-money laundering policies would be required from all participants.

Similarly to the US, the Philippine SEC highlights the importance of registering tokens as securities should they fall within the legal definition. As stated by US SEC Chairman Jay Clayton, tokens fall under the definition of securities if there is a ”reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others“.

 

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ICOs Only Account for Less Than 2% of Securities Lawsuits

A report released by litigation consultancy firm Cornerstone Research indicates that initial coin offerings (ICOs) account for under 2% of securities class action lawsuits – just 12 of 750 cases.

ICOs are not the main offenders… are they even securities?

With the total number of securities lawsuits at levels unmatched since 1995, the report found cases involving ICOs hit just five in the latter part of 2017, and have reached seven in 2018 so far. There have been 111 suits filed in total since the start of the year. While cases filed against American companies are reported to be on the decline, there is a growing number opened against European and Asian companies, nearly double that seen in the last decade.

Whether ICOs even classify as securities is currently up for debate. Securities can be defined as financial assets that represent a proof of ownership in the stake of a company that has intrinsic monetary value, but some argue tokens and cryptocurrencies purchased during ICOs do not qualify under this definition. This disagreement has led many to question whether the US Securities and Exchange Commission (SEC) is even the correct entity to be investigating cases involving ICOs.

Despite much bad press regarding ICOs, several of these few cases opened against crypto-related companies found fault in their reluctance to file their tokens as securities, which is a legal requirement in the US.

In one instance, Ripple (XRP) is facing three separate lawsuits from investors who lost money when they sold the tokens on. The plaintiff in one of these cases argues the XRP classifies as a security because i) they must be purchased with money, ii) investors reasonably expect to profit from them due to Ripple’s own promotional efforts, and iii) the profits collected are determined by the company’s management decisions.

The Massachusetts branch of the SEC suspended five cryptocurrency companies offering ICOs in March this year because they had all failed to register their tokens as securities.

In February, SEC Chairman Jay Clayton declared that ICOs must meet securities regulations, ”end of story”, although in June the SEC voted that Ethereum did not meet the definition of a security. Ethereum and Ripple have fundamentally different structures and use-cases for them, but it indicates a more reasoned, practical approach may be taken by the SEC in the future.

 

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Educational Hoax ICO Site Launched by US Government

The US Securities and Exchange Commission (SEC) has produced a website advertising a scam initial coin offering (ICO), in an effort to educate the populace on how to identify such fraudulent websites.

In a Wednesday press release, SEC Chairman Jay Clayton discussed the intent behind the initiative. While acknowledging the rapid growth in the number of ICOs, he explained a need to help give investors the tools they require to recognize fraudulent sites.

”We embrace new technologies, but we also want investors to see what fraud looks like, so we built this educational site with many of the classic warning signs of fraud… I encourage investors to do their diligence and ask questions,”
Clayton detailed.

Howeycoin ‘ICO’

The mock ICO website advertises the fictitious Howeycoin token, reading: ”Howeycoin is the newest and only coin offering that captures the magic of coin trading profits AND the excitement and guaranteed returns of the travel industry. Howeycoins will partner with all segments of the travel industry (air, hotel, car rental, and luxury segments), earning coins you can trade for profit instead of points.”

Information provided on the website looks much like that supplied during a genuine ICO, with statements such as “We anticipate OVER 1% daily returns, with DOUBLE 2% returns on Tier 1 investors in pre-ICO stage secured purchases.”

SEC Chief Council Owen Donley noted the ease at which scammers can utilize convoluted jargon to lure individuals into false investments, but pointed out significant red flags that can indicate fraud.

By clicking on the internal website links, visitors are directed to an SEC site that notifies them of the truthful nature of the website.

The SEC notice explains: ”Our bogus site is a mash-up of a number of different things we’ve seen – any particular fraud may be harder to spot than the red flags here. Here are some of the signs of fraud that are on the Howeycoins site – we hope reviewing these may help you recognize a real fraud in the future!”

Targetting of ICOs

There is certainly an emphasis currently placed on targetting ICOs and cryptocurrency related scams, when in fact around less than 1% of Bitcoin-related transactions have been linked to illicit activities. Although, it is true that several high-profile ICOs have been shut down due to suspected, or convicted fraudulent activity.

While it is certainly necessary to regulate ICOs to ensure they are providing the services and tokens that they are advertising, the current enforcement of numerous subpoenas by the SEC does indicate an arguably overzealous approach towards cryptocurrency start-ups when compared to how mainstream financial scams are currently handled.

 

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Brian Kelly Still Bullish About Bitcoin Climbing

Comments made by BKCM founder Brian Kelly last week, when Bitcoin officially crossed the USD 10,000 line before its subsequent drop, suggested that there were three clear factors that would determine the coin’s next big rally, according to CCN.

The Goldman Sachs factor

Kelly sees the next support levels after USD 10,000 as USD 12,000 and USD 14,000. One factor he cites as being significant in securing this charge, was last week’s announcement by Goldman Sachs confirming the go-ahead to invest customers funds in Bitcoin through a new cryptocurrency trading desk; a decision by the bank largely provoked by customer demand.

Jon Matonis, Bitcoin Foundation founder and Visa executive, is animated with such announcements by major financial institutions such as Goldman Sachs, commenting:

“I think it’s fabulous that they’re getting into it because it brings in new liquidity. They’re going to develop futures markets, options markets — I even think you’re going to start to see interest-rate markets around Bitcoin.”

Matonis sees the move as one which will allow the cryptocurrency market to mature through more public trading of bitcoin. The New York Times reported yesterday that Intercontinental Exchange, owner of the New York Stock Exchange (NYSE), is also considering allowing customers to buy and hold Bitcoin, which would become the second Wall Street financial institution to consider such a step within weeks.

Defining Bitcoin

Another factor, according to Kelly, is the clarity now being offered by the SEC regarding the description of digital currencies. SEC chairman’s Jay Clayton’s recent suggestion that if Bitcoin is a medium of exchange it, can’t be deemed as a security due to its use as a currency which he sees as a positive mover for Bitcoin. However, Aaron Wright, director of blockchain project Cardozo, recently suggested that there is “superficial appeal” to treating Bitcoin and related tokens as securities, as many of them were still seen as “speculative assets”.

New York Blockchain Week

Another push to Bitcoin’s potential pricing fortunes, according to Kelly, is this month’s Blockchain Week being held in New York. Partnering the New York City Economic Development Corporation in the project, Kevin Worth, CEO of Coindesk, comments about the week’s headline event, ‘Consensus’.

“Consensus is more than just a conference. It’s the largest and must-attend gathering of everyone involved in our rapidly growing ecosystem. We’re proud to partner with companies that continue to innovate and actively work toward taking their projects live.”

 

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Telegram Cancels ICO Amid Tightening of Regulations

From what was rumored to be the biggest initial coin offering (ICO) in history, Telegram has now shut down its much-publicized ICO, as reported by the Independent.

While some have claimed that Telegram already successfully raised its monetary target, it seems more likely that the cancellation was due to the tightening of ICO regulations happening across the world and particularly in the US.

ICOs have collectively raised USD 12 billion in funds since 2014, but perceived connections with scams and fraudulent activities have led the Securities and Exchange Commission (SEC) to scrutinize the legality of these fundraising efforts.

SEC chairman Jay Clayton recently testified before the US Congress, saying, “Many ICOs are being conducted illegally. Their promoters and other participants are not following our security laws.”

Satis Group created a resource to identify ICOs and cryptocurrencies as scams, but Telegram’s fundraising for the Telegram Open Network (TON) coin does not appear to fall into this category. Officials have argued, however, that this could not be accurately identified until the final launch that was scheduled for later this year.

Telegram’s ICO

In the white paper detailing the ICO held by Telegram, the company detailed its objective to create a cryptocurrency that could overcome the limitations of Bitcoin and the other leading cryptocurrencies. The digital currency was advertized to offer lower transaction fees at quicker transaction times.

The white paper reads: “To this day, no consensus-backed currency has been able to appeal to the mass market and reach mainstream adoption. Telegram will use its expertise in encrypted distributed data storage to create TON, a fast and inherently scalable multi-blockchain architecture.”

Frustrated investors

Investors and industry pundits have reacted angrily to the cancellation, which reportedly raised USD 1.7 billion. While this gives Telegram enough finances to launch TON, they have put the cryptocurrency on hold.

ShapeShift CEO Erik Voorhees is one such frustrated industry specialist who vented on Twitter.

The SEC has created an environment where only the rich (aka “accredited investors”) are able to get access to financial deals. The plebeians must stick to the lottery. Telegram Cancels public sale of tokens due to SEC: https://t.co/jHH4LgMvO5

— Erik Voorhees (@ErikVoorhees) May 2, 2018

Telegram has a long way to go to rebuilding a relationship with the investors. With its ICO promoted as bringing the world the first mainstream cryptocurrency, this is disappointing news for some in the cryptocurrency market.

 

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SEC Chairman Doesn’t Believe Every ICO is a Scam; Japan and South Korea Charge Ahead Toward Regulation

Jay Clayton, the Chairman of the US Securities and Exchange Commission (SEC), gave a speech at a Princeton University event that provided fascinating insight into his evolving views on how to approach initial coin offerings (ICOs) as well as how to classify and regulate cryptocurrencies.

Not every ICO is a scam

Essential discussions that delve deeper into blockchain technologies, ICOs and cryptocurrencies are taking place all over the world. Perhaps now that the markets are cooling off, the topic of how to legitimize the lucrative technology is finally on the table.

During the event, the SEC chairman disregarded that all ICOs were fraudulent scams, bearing contrast to his position in February. At a Senate hearing, Clayton declared he was “unhappy” with how ICOs were conducted, based on the fact that they did not follow private placement rules, and that there were some fraudulent ICO operators.

Clayton made a potent remark that brought to light a solution for a lesser-mentioned problem: what happens if the technology continues to have fraudulent actors? He said:

“I think if we don’t stop the fraudsters, there is a serious risk that the regulatory pendulum – the regulatory actions will be so severe that they will restrict the capacity of this new security.”

Overseas efforts

The United States isn’t the only country wrestling with the ICO debate; in Japan, a recent government-backed study revealed that it now is looking to bring forth the proper legal and regulatory frameworks to give the go-ahead on the popular capital-raising method.

The report included guidelines that will identify investors, which will prevent money laundering, which acts as a protection for existing shareholders and debt holders, making “unfair” trading practices such as insider trading a thing of the past for cryptocurrencies.

The report also goes on to classify three types of ICOs:

The “venture company type” is the typical fundraising method and is defined as “fund-raising by venture companies through high-risk, high return investments”.

The second is the slightly lesser known “ecosystem type” which is described as “fund-raising for collaborative efforts in which multiple corporations such as companies and local governments are engaged”.

The third and probably least known of them all is the “large company type”, which is for “fund-raising by companies for certain in-house projects with high risk”.

Advancements in the United States and Japan are steering the future of cryptocurrency in the right direction; BitcoinNews recently reported that South Korea is making preparations to tax cryptocurrencies, which may come off as alarming, but can be a vital spoke in the regulatory wheel.

Rallying support

What makes it even less alarming is that the third largest fiat-to-Bitcoin market in the world is also preparing to have a cryptocurrency for its capital city, and in fact, the United States and Japan are above South Korea in the fiat-to-Bitcoin market listing.

It is evident that despite the constant negative press, cryptocurrencies are part of very progressive discussions taking place in the largest markets in the world. It is these serious pioneering efforts that will make blockchain technologies and cryptocurrencies validated as part of the economy.

 

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Nevada Goes Ledger Nano Mad at Christmas

Price protection app Earny has recently revealed that the crypto hardware wallet, Ledger Nano, was US state Nevada’s most popular purchase over the 2017 Christmas season. The wallet is one of the cryptocurrency industry’s most favored along with Trezor and Keepkey.

Although the published data did exclude smart home devices, the survey demonstrates that the popularity of the device in crypto-friendly Nevada is growing.  At least in some states, user interest in cryptocurrency has some momentum. The data reflected purchases made between November 2017 and February 2018 with a range of frequent purchases throughout the country from lava lamps to glue.

Hardware wallets such as the Ledger Nano have grown in popularity as they provide a far more secure storage of crypto assets. This is due to robust safety features for storage and for securing digital payments. The Nano connects to any computer with a secure LED display which requires users to check and double check each transaction with a single tap.

Such wallets are a preferred way of storing cryptocurrencies, as platform-stored assets could be susceptible to online cyber vulnerabilities.

It is not surprising perhaps that Nevada’s crypto trading public has warmed to the Ledger as the state was the first in the US to block taxation on blockchain transactions. The blockchain-friendly bill was introduced last year and received unanimous Senate approval.

The US is starting to becoming increasingly Bitcoin-friendly, state by state, following recent enthusiasm for cryptocurrency shown by both Nevada and Arizona. Along with other states such as Wyoming and Tennessee, numerous crypto-friendly bills have been introduced in houses of state legislatures around the country.

A reflection of this interest on a federal-state level was Washington’s recent SEC and CFTC hearings on 6 February this year which was focussed on cryptocurrency and blockchain issues. Chair of the SEC, Jay Clayton, although not a crypto enthusiast,  said that the role of virtual currencies in a modern financial ecosystem “couldn’t be denied”.

 

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