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SEC Cracks Down on ICO Promoters, Social Media Influencers


ICO promoters and other social media influencers will now be targeted by the US Securities and Exchange Commission (SEC). The SEC is not known to be friendly towards ICOs and has a number of cases against token launches.

The recent settlement with music mogul DJ Khaled and professional boxer Floyd Mayweather are examples of SEC coming down hard on people who promote ICOs without informing the regulator about the compensation received. This had been warned by SEC a year back when it said, “Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.”

In November, it again emphasized the role of promoters in ICOs, this time turning towards investors: “Investors should be skeptical of investment advice posted to social media platforms, and should not make decisions based on celebrity endorsements. Social media influencers are often paid promoters, not investment professionals, and the securities they’re touting, regardless of whether they are issued using traditional certificates or on the blockchain, could be frauds.”

The move is definitely going to affect ICO promotions in the United States. With most ICOs declared securities under its regulations, SEC chairman Jay Clayton said, “Many of the ICOs that you see and you talk about, they are securities. And if you’re going to offer or sell securities, you have to do so in compliance with our laws.”

Coinbase, for example, has been working very closely with the US regulators and even with its wish to add five tokens to its listing, has only been able to do only two in the last seven months. Listing of an unauthorized token that is a security can lead to indictment for illegally distributing unregistered securities.

The penalties are heavy, with fines being double to that of money received. Mayweather was fined USD 600,000 for promoting three different ICOs in return for USD 300,000.


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SEC Boss Unwavering on the Woes of Crypto Investments

SEC Boss Unwavering On The Woes of Crypto Investments

In an interview with columnist Andrew Ross Sorkin of the Times Talk on 29 November, the Chairman of the US Securities and Exchange Commission (SEC) Jay Clayton has expressed an unyielding stance towards the perceptions of the cryptocurrency markets. Clayton emphasized the lack of safeguards in this emerging market structure – hence his skepticism, however, he was for a balance that involved protecting the interests of investors.

The interview lasted for about an hour, and few minutes into the interview, when Andrew asked Sorkin where he has landed with the whole regulation process, Clayton responded saying:

“There are two rule sets for the securities market, one for the offering and sale of securities, and the other for the trading of securities. Our rules have stood the test of time very well and we should not change them to adapt to technology. Technology ought to be able to fit within our rules”.

Despite his view of the technology as having “promise for adding efficiency to our [capital] marketplace”, he is worried about the investors’ protection aspects of the rules currently governing the capital markets being not readily applicable to the cryptocurrency market.

In explaining the difference between a currency and a commodity, Clayton made it clear that Bitcoin is considered a currency because it’s widely distributed and its distribution was not controlled by a single entity. It’s used as a medium of exchange, and you’re not looking to the efforts of others to increase your return. In the case of a commodity, they generally have a use other than a medium of exchange, which he inferred Bitcoin had none.

A baffling response emerged from Clayton when he was asked in line with Managing Director and Chairwoman of the International Monetary Fund Christine Lagarde’s public opinion of cryptocurrencies in the future as being backed by governments and whether current token offerings would then be validated or will be phased out due to a regulated version. Clayton responded, “we’ll see.”

During the discussion, Clayton revealed to Sorkin how the agency had been trying so hard to educate investors on the dangers of investing in the cryptocurrency and similar markets. He essentially maintained that there are risks involved when participating in such investments. Clayton said:

“We tried to get the word out that although the trading looks like the trading you would see on Nasdaq or on the New York Stock Exchange, these markets do not have the same kinds of safeguards for you. We’ve worked for […] seventy years to try to prevent manipulation in those [traditional] markets, to try and prevent people from taking advantage of the small player.”

In the long-term, Clayton’s view on a regulated cryptocurrency market will hinge on the permanent use case, but right now, he perceives this is currently unclear as there are lots of successes and failures as with any new emerging technology.

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German Central Bank Hails “Success” of Two Blockchain Trials

Germany’s central bank, Deutsche Bundesbank, has successfully completed two blockchain trials during its collaboration with Deutsche Börse, owner of the Frankfurt Stock Exchange.

The two blockchain prototypes were designed to test the technology’s potential in securities settlements, transactions, and payments, as well as bond repayments.

A joint press release on Thursday reveals that these aims were ”successfully” achieved, with the prototypes facilitating “productive operation of a realistic financial market infrastructure”.

Developed on Hyperledger Fabric and created by Digital Asset, the prototypes come from a joint blockchain research project dubbed BLOCKBASTER. The collaboration came together with the goal of developing a blockchain framework to transfer and settle securities and fiat currency.

The press release pointed to the recent upgrades on both Hyperledger Fabric and Digital Assets, saying they may well benefit the performance or the prototypes further if they are updated.

Berthold Kracke, CEO of Clearstream Banking and head of Clearstream Global Operations at Deutsche Börse Group, praised the tests for proving that blockchain can be the basis for financial settlement applications, as well as potentially for other financial infrastructures.

Burkhard Balz, member of the executive board at Deutsche Bundesbank, said that the positive results have encouraged them to continue experimenting with relevant blockchain use cases and pursue the implementation of the two prototypes further, citing that in particular, he sees a future use for them in processing ”high-volume applications”.

Blaz noted that permissioned blockchains have proven to serve the needs of the financial sector well, while Kracke finished, ”We are very happy with the results of the project… we were able to tailor the product to the needs of the industry.”

Deutsche Bundesbank is not the only central bank conducting blockchain tests, with the likes of Canada and South Africa already hosting similar trials.


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Initial Coin Offering Regulation Draft Expected by June 2019 in Taiwan

In Taiwan, a national regulation standard for initial coin offerings (ICOs) is presently being drafted up by its Financial Supervisory Commission (FSC).

As reported by a local news outlet, the Taipei Times, FSC Chairman Wellington Koo has said that these standards will make ICO tokens as easy to invest in, and as liquid as traditional stocks.

Security Tokens

Speaking at a meeting of the Legislative Yuan Finance Committee, Koo remarked that the first draft is expected to arrive by June next year; these comments were made in response to legislator William Tseng who had asked if the Taiwanese government had plans to regulate the digital crowdfunding phenomenon.

“The more we regulate, the more this new economic behavior wanes,” Koo said.

The aim is to simplify regulations and increase token liquidity, a move prompted by the notoriously fraudulent waters of the ICO markets. The new framework will cause ICO issued tokens to be classified and regulated as securities, similar to what the United States has done, but to little fanfare.

Though Taiwan won’t be applying a blanket classification on all cryptocurrencies, the Taipei Times writes:

“…tokens exchanged for goods, such as those used in accruing points at convenience stores or mileage points accepted by airlines, would not be covered by the standards,”

According to Koo, this is in no way a means of stifling innovation and growth in the blockchain sector, something of which the Securities and Exchange Commission (SEC) in the United States is currently under fire for.

Koo said: “The commission has no intention of curbing the creativity and productivity associated with cryptocurrencies if they are not used as securities,”

Investor Security

Securities and Futures Bureau Deputy Director-General Tsai Li-ling described ICOs as a public fundraising activity that differs from cryptocurrency trading which is similar to that of trading gold.

Taiwan could also soon see cryptocurrencies covered by existing anti-money laundering (AML) laws; in doing so, cryptocurrency exchanges would be required to collect and retain transaction records and be responsible for the reporting of suspicious activities to authorities.

Under the new framework, ICO issuers would need to disclose degrees of information that other publicly traded companies are required to.

ICOs are a contentious facet of the blockchain industry; nations such as China have banned them outright, whilst others such as Malta have found a means to accommodate them. One of the largest players on the international stage, South Korea, has had a ban in place since the winter of 2017, though in November a decision to uphold or lift the ICO ban will be made.

Last year when China and South Korea banned ICOs, Taiwan remained crypto-positive, as the nation’s parliament and cabinet discussed the matter, with one legislator saying:

“Just because China and South Korea are banning, doesn’t mean that Taiwan should follow suit – there is a huge opportunity for growth in the future. We should emulate Japan, where they treat cryptocurrency as a highly regulated, highly monitored industry like securities.”

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Joint Investigation finds SEC Damaging to US Blockchain Startups

An investigation conducted by Yahoo Finance and Decrypt Media has found that the United States Securities and Exchange Commission (SEC) has been “putting blockchain startups at risk” with an expanded crackdown on initial coin offerings (ICOs).

Startups are suffering

In the report from Decrypt Media on 10 October, the authors describe the SEC as “exerting pressure” on companies that it issued subpoenas to earlier in 2018 and furthermore, has subpoenaed more, apparently targeting those who failed to sell their tokens “exclusively to accredited investors”.

As a result, companies have been refunding investors and paying fines, many other startups have struggled to meet the requirements of the SEC, describing themselves as being “left in the dark” on how to satisfy the regulatory watchdog.

The battle to classify cryptocurrencies in the US has been an ongoing and tremendously tricky one for those with desires to start a blockchain or cryptocurrency enterprise, and for those who wish to see the industry flourish in the States.

Recent events

Earlier this year, the SEC stood firm with its decision to classify digital tokens issued via an ICO as securities, a decision that John McAfee spoke out against. Though this classification does not apply to Bitcoin or Ethereum, issuing a token sale in the US is considered arduous if not almost impossible for startups.

As a result, several private entities and organizations in the United States have formed, banded together and begun tackling this notion alongside governmental bodies; both the Chamber of Commerce and the Commodity Futures Trading Commission (CTFC) have called for a sound regulatory environment, one in which blockchain projects can at least be tested in a sandbox similar to that of the United Kingdom.

In July, the Chamber of Digital Commerce (CDC) released a publication that offers itself as a guideline on ‘Understanding Digital Tokens’, written for the benefit and education of policymakers and practitioners. The paper outlines distinct attributes for various types of tokens, placing the blanket token classification of Securities under question.

Regulatory uncertainty

Industry figures also wrote a letter to the SEC outlining their position on the “intrusive” nature of SEC regulations. The letter claims that the securities classification is causing domestic companies to leave the US in search of greener, more accommodating pastures.

The Blockchain Association was also recently formed to lobby the American government and push for regulatory clarity as well as define best-interests for both the crypto or blockchain industry and the American economy.

According to the report, firms claim that they are unable to communicate with other firms and work out how to handle the matter; and according to a high-profile securities attorney, are supposedly “holding their breath” awaiting new rules from the SEC, but are in no way confident that they will be providing any.


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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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Bittrex Teams up with Licensed Broker-Dealer for Securities Trading

Crypto exchange Bittrex is teaming up with licensed broker-dealer Rialto Trading to launch a new digital securities trading platform, pending approval from the relevant US authorities. Rialto Trading is an Alternative Trading System (ATS) that already offers fixed income securities, and once approval is granted it will begin offering crypto securities with the help of Bittrex’s expertise.

The CEO of Bittrex, Bill Shihara, says, “We’re merging Bittrex’s technology, cybersecurity and blockchain expertise with Rialto’s deep knowledge of the securities industry. And, when you add that foundation with Rialto’s extensive background in financial services, including Shari’s experience at Goldman Sachs and Deutsche Bank, this new venture is well-positioned to further advance blockchain’s adoption by offering a comprehensive solution at the right time.”

The US Securities and Exchange Commission (SEC) declared in 2018 that most initial coin offering (ICO) related cryptocurrencies were securities. The essence of the SEC’s new classification system is if investors buy a cryptocurrency and expect profits, and profits from that cryptocurrency go to a centralized organization, then that cryptocurrency is a security. Sufficiently decentralized cryptos like Bitcoin and Ethereum are not going to be considered securities, and so far the SEC has only given traders the green light to trade these without following securities laws. Exchanges must work with the SEC to offer trading for most other cryptos. Additionally, ICOs that don’t go through the SEC are illegal.

This is major news for Bittrex, the 37th largest exchange in the world according to CoinMarketCap with trading volume near USD 30 million per day as of 24 August 2018. Bittrex has been a popular exchange since the early days, and if this partnership with Rialto Trading is successful they will soon be able to offer most crypto without worrying about breaching securities laws.

Being able to offer legal securities trading will give Bittrex a major competitive edge over other exchanges that offer services to US citizens. Coinbase, the largest crypto exchange headquartered in the United States, is also making efforts to start offering securities trading via obtaining a broker-dealer license. Instead of partnering with a broker-dealer like Bittrex is, Coinbase is outright buying two firms with broker-dealer licenses, Keystone Capital and Venovate Marketplace.


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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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Kashmir Hill – Federal Judge Rules Bitcoin Is Real Money

Kashmir Hill – Federal Judge Rules Bitcoin Is Real Money: contributor Kashmir Hill (@KashHill) highlights a new development regarding ways existing laws can be applied to Bitcoin-related activity.  Excerpts:

“In defending himself against the SEC suit, Shavers argued that Bitcoin isn’t actually money and that the SEC shouldn’t be able to prosecute him.”

“‘Shavers also contends that his transactions were all Bitcoin transactions and that no money ever exchanged hands.’”

“‘It is clear that Bitcoin can be used as money,’ writes Judge Mazzant in a ruling on Tuesday. ‘It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses.’”

”’[Bitcoin] can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan,’ writes Mazzant. ‘Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.’”

 – (Futher discussion of this legal memorandum)

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