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SEC Subpoenas Alleged “Pump and Dump” ICO

The US Securities and Exchange Commission (SEC) has filed a subpoena in a district court of California to get the records of an alleged USD 100 million “pump and dump” Initial Coin Offering (ICO) by Jeffre James and his trust Saint James Holding and Investment Company.

According to the SEC, the subpoena was filed under an application on 5 October at the US District Court for the Central District of California against a company named Saint James Holding and Investment Company Trust and its owner James.

The move comes after the SEC suspended trading in an associated penny stock firm Cherubim Interests back in February. According to the SEC, a penny stock firm Cherubim was undergoing a USD 100 million financial commitment to launch an ICO for the St James Trust.

According to the filing:

“After Cherubim’s stock price and trading volume increased on this news, certain individuals associated with the company may have ‘dumped’ their overvalued Cherubim stock for significant profits.”

ICOs are currently banned by the SEC in the United States. The federal commission also provided a Memorandum of Understanding (MoU) from its archive regarding a financial commitment for a so-called Self Sustaining International Communities Coin (SJT).

The SEC also disclosed that the reason behind its suspension of trading of Cherubim was that the commission was doubting the accuracy of the firm’s disclosures. Cherubim is also reportedly being probed for acquiring assets back in January.

The Commission only decided to go to court after its own subpoenas to both St James Trust and James went unanswered despite serving them personally and extending their deadlines multiple times.

The court order, if issued will require St James Trust to disclose its records to the SEC for its fact-finding mission regarding the operation of the company and come to a conclusion. No charges have yet been filed by the SEC.

The SEC is clamping down hard on cryptocurrency-related projects in the country, especially ICOs. By the end of last month, SEC had also filed charges against an international securities dealer offering Bitcoin-funded security swaps in violation of federal security laws. It has also outlawed almost all exchange-traded funds (ETFs) that were tabled for approval.

 

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1Broker to Start Processing Withdrawals Following SEC Shutdown

1Broker has announced that it will begin processing customer withdrawals on 11 October 2018, a surprising turn of events considering that they were shut down by the United States Securities and Exchange Commission (SEC), Federal Bureau of Investigations (FBI) and the Commodity Futures Trading Commission (CFTC).

We will start processing withdrawals tomorrow at 12:00 (UTC). Thanks for your patience in the past days!

— 1Broker (@1Brokerio) October 10, 2018

1Broker was a popular trading platform that launched in 2012. Due to its relatively early start, it had a policy of allowing users to be anonymous. This was at first legal but new regulations have made this illegal if doing business within the United States, since know your customer (KYC) and anti-money laundering (AML) policies are required under the law. An undercover FBI agent bought Bitcoin investment products on 1Broker from within the United States, since they require nothing more than an email to signup.

The FBI and SEC coordinated to shut down 1Broker on 27 September, claiming that it was selling security-based swaps and failed to register as a dealer, or conduct its business on an officially registered exchange. There was outrage in the crypto community since it appeared customer’s funds were to be held indefinitely, which would harm up to 50,000 users on the platform, the opposite of the SEC’s mission of protecting investors. Additionally, 1Broker is based in the Marshall Islands, a sovereign nation outside of the United States, and it seemed like a major overstepping of bounds for the US to seize 1Broker.

Now the situation has taken a positive and perhaps unexpected turn, and customers will be getting their money back. 1Broker’s domain was initially completely seized but opened in read-only mode soon after the incident. Now users will be able to go on the website and withdraw funds starting on 11 October.

The SEC’s action against 1Broker is just one of many regulatory enforcement actions in the crypto space recently. The United States Congress has asked the SEC to lessen the hostile environment in the crypto space by clarifying crypto regulations and making them more favorable towards crypto business.

 

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US District Court Rules CFTC Has Jurisdiction over Crypto

On 26 September 2018, Judge Rya W. Zobel of the US District Court of Massachusetts ruled that the Commodities Futures Trading Commission (CFTC) has jurisdiction to regulate all cryptocurrencies as commodities. This critical ruling was issued in response to a motion by My Big Coin to dismiss a case against them by the CFTC, on the grounds that the My Big Coin cryptocurrency was not a commodity.

The US District Court used a relatively broad definition of commodities to reach this decision. It says that commodities are all goods, articles and service rights and interests for which there are contracts for future or present delivery. The court references how the fact that Bitcoin has future markets factored into this decision.

The Director of CFTC Enforcement, James McDonald, says, “This is an important ruling that confirms the authority of the CFTC to investigate and combat fraud in the virtual currency markets. This ruling, like the one in McDonnell from Judge Weinstein in the Eastern District of New York, recognizes the broad definition of commodity under the Commodity Exchange Act (CEA), and also that the CFTC has the power to prosecute fraud with respect to commodities including virtual currencies. We will continue to police these markets in close coordination with our sister agencies.”

Simultaneously, the Securities and Exchange Commission (SEC) has previously declared that almost all cryptocurrencies are securities. The SEC says that any crypto which an investor buys in expectation of future profit is a security, if profits go to a centralized organization. The SEC says that only Bitcoin and Ethereum are decentralized enough not to be considered securities.

The end result is a hostile situation where most crypto companies can be regulated by the SEC and CFTC, as both commodities and securities. The reality is Bitcoin and other cryptocurrencies are an exotic new hybrid of commodities and securities, and there are discrepancies and irregularities should states regulate cryptocurrencies like traditional financial assets. Some industry commentators feel it would be best if a new government agency were created to regulate the crypto space, with the power to override decisions by the SEC and CFTC to ensure fair treatment of crypto companies.

 

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Bipartisan Common Blockchain Definition Bill Presented by US Legislators

A bill proposed to the US House of Representatives by two legislators is seeking to establish a “consensus-based definition of blockchain”.

Defining moment

Titled “Blockchain Promotion Act of 2018”, the bill was produced by Congresswoman Doris Matsui and Congressman Brett Guthrie. They are members of the Energy and Commerce Subcommittee on Communications and Technology and Digital Commerce and Consumer Protection.

Introduced on 1 October, the bill intends to have the Department of Commerce create a working group of stakeholders within the government and private entities in order to achieve this consensus and study the technology further.

According to a press release, the “bi-partisan” bill comes with recommendations for the National Telecommunications and Information Administration (NTIA) and the Federal Communications Commission (FCC) to further examine and study the impact of blockchain technology “on spectrum policy and opportunities for the adoption of blockchain to promote efficiencies within the Federal government”.

Matsui describes the technology as transformative for the global digital economy, citing “greatly increased transparency, efficiencies, and security in supply chains to more-opportunistically managing access to spectrum”, as blockchain deployment opportunities.

Battling for blockchain

Efforts to establish definitions of cryptocurrency alone in the United States have been ongoing and come up against significant barriers set in place by the Securities and Exchange Commission (SEC). Enterprises, innovations and federal entities are making the push to make US laws more accommodating for blockchain.

Cryptocurrencies in the states are generally classified as securities. Bitcoin and Ethereum don’t qualify as securities as they are decentralized, though this has prompted a backlash from the blockchain industry. In addition to this, the Chamber of Digital Commerce (CDC) published a paper that offers a guide on digital tokens for law and policymakers.

Currently, initial coin offerings are tricky to operate in the US as they require tedious and lengthy application processes to be permitted by the SEC, who known to be firm with unlicensed ICO traders.

The SEC is being pressed by the United States Congress clarify crypto security guidelines, a factor of which is having effects on the establishment and operation of domestic enterprises. In a letter to the SEC, Congress claims the SEC’s lack of clarification could cause the country to fall behind in the crypto and financial technology sectors.

Pressing matters

Over the summer, a Congressional hearing saw the Chairman of the Commodity Futures Trading Commission (CFTC) speak up against the lack of suitable laws that allow the CFTC to participate in Proof-of-Concept blockchain tests. He said that due to bureaucracy, industry innovation is being stifled in the US.

A few weeks ago, blockchain companies formed “The Blockchain Association“, a lobbying group with the intention of representing entrepreneurs as well as investors who wish to navigate US laws compliantly. The group also wishes to see the present issues of cryptocurrency taxation and classification addressed. Coinbase, Circle, Polychain Capital, Digital Currency Group and Protocol Labs are the founding members.

In the Blockchain Promotion Act of 2018 press release, Congressman Brett Guthrie says:

“Blockchain can be a great resource for innovation and technology, but we must figure out exactly what best common definition is and how it can be used. I was proud to join my colleague Congresswoman Doris Matsui to introduce the Blockchain Promotion Act to better understand blockchain and its role in our digital economy.”

 

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1Broker to Launch ”Read-Only” Version of Bitcoin Futures After SEC Charges

After the US Securities and Exchange Commission (SEC) filed charges against Bitcoin futures firm 1Broker last week, the website now has plans to re-launch on a ”read-only” basis.

At the time of the SEC filing charges, the US Federal Bureau of Investigation (FBI) seized the website, with customers left without access to their funds. A slight relief came Tuesday in the way of 1Broker’s lawyers recommending that the brokerage website can go back online in a read-only format, meaning that customers can view balances and transaction history but cannot pursue any active trades or retrieve funds.

1Broker has been adamant that customers funds remain safe despite the legal action taken against them, saying that its top priority is allowing customers to withdraw from their accounts.

A post on parent company 1Pool’s website outlining the current situation of the company details its priority to protect customers and retrieving their funds: ”The company holds enough funds to cover all withdrawal requests, of course. Before we can take the required steps to do that, we have to seek permission from the authorities.” Balances will have to be paid out via an alternative domain also, its message reads.

CEO of 1Broker Patrick Brunner spoke to CoinDesk on the subject, saying that the company is asking for patience while the process transpires. “Unfortunately, such matters take some time – from our point of view, we are ready to process withdrawals right now,” Brunner told CoinDesk.

The read-only version of the website is expected to go live today on Wednesday.

The charges

The SEC claims that 1Broker violated federal law by allowing US traders to exchange on its platform.

An FBI agent created an account on 1Broker and made a purchase of what they claim are classified as securities, for which the company does not hold the correct licenses from the SEC. The FBI cited an additional grievance in that 1Broker only required an email address and username to open an account – a lack of any know-your-customer compliance.

 

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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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1Broker Shutdown by SEC as Users Lose Access to Funds

On 27 September 2018, the United States Securities and Exchange Commission (SEC) filed charges against 1Broker, a popular crypto investment site headquartered in the Marshall Islands. Its website was seized by the Federal Bureau of Investigations (FBI), leaving no way for customers to access funds.

An FBI agent purchased products on 1Broker that could be considered security-based swaps, and found that only an email address and username was needed to open an account. 1Broker says that it had a statement in its terms of service that users were responsible for making sure it was legal to buy products on 1Broker, but the SEC and FBI clearly disagrees. The SEC says 1Broker failed to register as a security-based swap dealer, and failed to transact the security-based swaps on a registered exchange.

Criticism has been that it is counter-intuitive for the SEC to perform an action like this, which hurts the up to 50,000 traders and investors that use 1Broker, since the goal of the SEC is to protect investors. It is important to note that 1Broker is not even based in the United States, it is in the Marshall Islands which is a sovereign nation.

A simple fix for this would have been to ban US IP addresses. Optimally, 1Broker should have verified customer identities to prevent US customers from using its platform. 1Broker launched in 2012, during a time when regulations were lacking, and it stuck with a policy of practically total anonymity for customers up to the present day.

Since 1Broker customers were able to maintain anonymity, receiving funds back may be a lengthy process at best, and impossible at worst. The SEC, FBI, and possibly the Commodities Futures Trading Commission (CFTC) who is also filing charges, are in charge of the refund process. This will likely lead to demands for full verification of customers before refunds are processed. Most customers will likely be unable to comply for multiple reasons, such as tax liability, maintaining anonymity, or using 1Broker in a country like the United States where it is considered illegal.

Therefore, this is not only a shutdown of 1Broker but will end up being a total loss for most of its users. This is the sort of treatment users usually receive on darknet markets like the Silk Road, where drugs and other illegal goods are being transacted. It bears consideration that traders and investors using a platform with a strong reputation should lose their investment due to government action, especially the action of a foreign government.

The reality is that 1Broker posed no threat or risk to investors, and the SEC, FBI, and CFTC appear to be the ones damaging investors in this case, which is the opposite of their mandated mission to protect investors.

 

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US Spent Over $5 Million on Blockchain Espionage in 2018

The United States government has spent USD 5.7 million with blockchain analytics firms so far in 2018 and this spending is accelerating, according to a report by digital currency publication Diar. Blockchain analytics firms are paid to conduct blockchain espionage, for criminal prosecution, taxes, and to ensure crypto regulations are being followed.

Bitcoin has a public blockchain ledger, where every transaction and address can be viewed by anyone. Firms like Chainalysis, Elliptic, CipherTrace, Scorechain, Coinfirm, Blockchain Intelligence Group, Bloq, and DMG Blockchain Solutions have developed advanced software which can attach identities to Bitcoin transactions, and transactions for other cryptocurrencies as well. The biggest customers of these firms are banks and financial institutions, who use blockchain analytics to ensure no breach of know your customer (KYC) or anti-money laundering (AML) policies. Collectively, the major blockchain analytics firms listed have received USD 28.8 million of contracts.

The Internal Revenue Service (IRS) is the biggest spender relative to other US government agencies at USD 2.19 million. The IRS is in charge of taxes in the United States, and it seems it is using the most advanced blockchain tracing technology people to build cases against crypto users who are not paying taxes. This despite members of the United States congress requesting that the IRS make its crypto tax guidelines clearer, since at this point the crypto tax code issued by the IRS is so unclear, prohibitive, and arduous that most crypto users don’t know how to pay crypto taxes.

The second biggest government spender is Immigrations and Customs Enforcement (ICE) at USD 1.54 million. This is probably because the ICE seizes drugs and other illegal goods at customs, and sometimes these packages are linked to crypto payments done over the darkweb.

The Federal Bureau of Investigations (FBI) takes third place in spending with USD 1.14 million, and this is probably related to crypto activity associated with criminal suspects and crime organizations. The Drug Enforcement Agency (DEA), in fifth position with USD 0.22 million, probably uses blockchain analytics firms for the same reasons the FBI does. The FBI and DEA can actually use blockchain analytics data in court for criminal prosecution.

The Securities and Exchange Commission (SEC) is at sixth place at USD 0.18 million. The SEC is cracking down hard on initial coin offerings (ICOs) and other fraudulent crypto-related securities, so it makes sense they’re spending some money on blockchain analytics. The Commodity Futures Trading Commission (CFTC) spends USD 0.12 million, likely to ensure exchanges are maintaining regulatory compliance, since Bitcoin trading is regulated under commodity laws.

 

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Canada Better Geared for Crypto Than US, Says Fund Boss

The head of Canada’s first fully-registered cryptocurrency investment firm has said that the country is further advanced in cryptocurrency policy than its neighbor the US.

CEO of First Block Capital, Sean Clark, has called for Canada to become a leading hub for crypto development and innovation due to his country’s more favorable conditions for new technologies.

Clark cites conditions in the Canadian crypto environment such as promoting educational awareness of new technologies and the government’s political will to push technology forward as indicators that the authorities fully comprehend the potential of blockchain and cryptocurrency to replace outmoded technologies:

“I think in general, the Canadian regulatory bodies understand the potential benefits of blockchain and cryptocurrency, and traditionally Canadian regulators have been open to technological innovation. That is different from what you get in places like the US.”

He maintains that the position in the US is quite different where the SEC seeks to have more control as a regulator which consequently restricts new innovations from taking hold. He sees this as a great advantage for Canada over time, providing the country with a huge pool of skilled technical know-how which can be drawn to the US. Clark believes government interest has been key in Canada’s blockchain and crypto development:

“This is what we’re seeing trickling down to the regulatory environment… as they are not stone-walling but rather embracing and wanting to understand the implications of blockchain technology and working with local companies to be able to understand and have the asset class flourish.”

The CEO sees his company as an example of how crypto forums can and should work closely with government regulators to push innovation into the frontline of technology. Part of the success of cryptocurrency-related companies having more freedom is the enthusiasm for crypto shown by Canadian prime minister Justin Trudeau.

First Block Capital became a mutual investment fund late last year. It works in a similar way to an ETF, enabling investors to purchase and store the equivalent of Bitcoin and redeem as and when needed.

 

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