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Regulation

EtherDelta Founder Charged by SEC For Operating an Unregistered Exchange

EtherDelta SEC

In an apparent first, the U.S. Securities and Exchange Commission (SEC) has charged the founder of EtherDelta, Zachary Coburn, with running an “unregistered national securities exchange,” according to a press release from the regulator.

“EtherDelta provided a marketplace for bringing together buyers and sellers for digital asset securities through the combined use of an order book, a website that displayed orders, and a ‘smart contract’ run on the Ethereum blockchain,” the agency noted.

EtherDelta’s users have processed over 3.6 million orders for ERC20 tokens during an 18-month period, including those that are defined as securities under the federal securities law, the SEC explained. It went further to argue that a large majority of the orders placed on the platforms “were traded after the Commission issued its 2017 DAO Report,” which stipulated that certain assets like the DAO tokens were securities, placing any platform that offered trading of such “digital asset securities” under the “SEC’s requirement that exchanges register or operate pursuant to an exemption.”

EtherDelta, which operates a trustless exchange where it only provides a platform for users to trade, failed to register with the regulator or file for an exemption, the agency stated.

The release also noted that the SEC had taken enforcement actions against a handful of tokens that had once traded on the exchange.

Stephanie Avakian, co-director of the SEC’s Enforcement Division, spoke on the charges against EtherDelta, arguing that it was mandatory for the platform to register with the SEC as it had “both the user interface and underlying functionality of an online national securities exchange.”

Coburn, who has neither admitted or denied the findings of the agency, had cooperated with the agency by agreeing to pay over $300,000 in disgorgement, as well as $13,000 in prejudgment interest and an additional $75,000 fine.

This article originally appeared on Bitcoin Magazine.

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In the Race for a Bitcoin ETF, Wall Street Has Plenty of Hurdles to Clear

Bitcoin ETFs: Where the Industry Stands Right Now (and Where It Going)

In the latter half of 2018, few developments have occupied crypto investors’ headspaces like the industry’s indefatigable pursuit of a bitcoin exchange traded fund (ETF).

This conversation lay largely dormant since the two brothers’ first attempt was rejected by the U.S. securities regulator in March of 2017. But the Winklevosses reignited the conversation when their second attempt at an ETF was shot down by the U.S. Securities and Exchange Commission (SEC) in July of this year. 

With the buzz back, the prospect (or failing prospects) of a bitcoin ETF have crowded the headlines of mainstream and crypto media alike. Following the Winklevosses’ failure to secure the coveted first-in-the-industry fund, the ensuing months would see a flurry of decision delays for existing applications, more rejections and revisions of said rejections.

The sheer volume of news surrounding ETFs — and the general complexity of the asset when compared to the simplicity of trading on the bitcoin spot market — makes the industry’s pursuit of one a rich and even abstruse topic.

So let’s see if we can set the record straight.

What an ETF Is and What It Means for Bitcoin

To start, a short explanation: an ETF is a fund that holds an underlying asset or assets, be they stocks, commodities, bonds, etc., which are then divided into shares for investors to buy. In structure, an ETF functions like a hedge fund, the primary difference being that an ETF is traded on a public market like shares of a stock, while a hedge fund is not.

With that primer in mind, we can now unpack the processes and jargon that constitute an ETF’s many working parts.

Typically, an ETF features four primary stakeholders:

  • a sponsor (the entity who creates the ETF)
  • a custodian (the entity who stores and manages the underlying asset/s)
  • authorized participants (financial institutions or accredited individuals who create and redeem a block of the ETF’s shares)
  • shareholders/investors (those who purchase the shares on the open market)

More or less, authorized participants and sponsors are in charge of the ETF’s supply. The participants create or redeem blocks of shares (called creation units) directly from the sponsor; typically, these creation units are settled in-kind, meaning they are purchased for or redeemed in the underlying asset. Once participants have purchased creation units, these units are then divided into shares and traded on public exchanges.

For bitcoin, an ETF would function similarly to ETFs for other commodities like gold and silver. Its sponsor, most likely a trust of sorts, would employ the help of a custodian to store the physical bitcoins backing the ETFs (or, in the case of futures, the futures contracts) and related cash flow, and it would also rely on eager financial institutions to jumpstart circulation by purchasing shares to trade on a regulated, legacy exchange like the NYSE, CME or Cboe.

Many investors see the bitcoin ETF as the hitherto undiscovered holy grail of institutional-grade bitcoin investments, something that could push the market to new heights. In the broader market, ETFs are considered to be a low-barrier, low-cost alternative to other investment vehicles like hedge funds, and per this rationale, community members in favor of a bitcoin ETF say it would finally give institutional investors easy, reliable access to the crypto market. Supporting this thesis, proponents often point to the impacts ETFs had on the underlying gold market, noting that bitcoin would likely experience a similar price stimulation.

Detractors don’t think this is a good thing. They believe that, by encouraging a flood of institutional money, a bitcoin ETF would drown the market in inflated valuations, an argument critics in other markets have made by insisting that ETFs distort prices and liquidity. So the argument goes: Why would we create an investment vessel that could leave bitcoin susceptible to the same inflationary threats that it was created to avoid?

The Playing Field

The merits of either argument are for another article entirely, but the perspectives are helpful for understanding why so many players are pursuing an ETF and why there’s so much noise surrounding it.

The following list looks at all past and current applications, some of which were refiled or restructured after the initial applications were rejected by the SEC or pulled by their sponsors.

In chronological order:

Winklevoss Bitcoin Trust

File date: July 2013

Status: Rejected March 2017

Sponsor: Winklevoss Bitcoin Trust

Custodian: Gemini Exchange

Listed Exchange: Bats BZX Exchange

Price Data Source: Gemini Exchange

Creation Unit Size: Basket of 100,000 shares

SolidX Bitcoin Trust

File Date: July 2016

Status: Rejected March 2017

Sponsor: SolidX Management LLC

Custodian: SolidX Management

Other Custodians: The Bank of New York Mellon (cash funds)

Listed Exchange: NYSE Arca

Price Data Source: TradeBlock XBX Index

Creation Unit Size: Basket of 100,000 shares

The Bitcoin Investment Trust

File Date: January 2017

Status: Withdrawn September 2017

Sponsor: Grayscale Investments LLC

Custodian: Xapo Inc.

Listed Exchange: NYSE Arca

Price Data Source: N/A

Creation Unit Size: Basket of 100 shares

VanEck Vectors Bitcoin Strategy

File Date: August 2017 (refiled in December 2017)

Status: Withdrawn September 2017 (and again in January 2017)

Sponsor: VanEck

Custodian: The Bank of New York Mellon

Listed Exchange: NASDAQ

Price Data Source: N/A

Creation Unit Size: N/A

ProShares Bitcoin ETF and ProShares Short Bitcoin ETF

File Date: December 2017

Status: Rejected at staff level but appealed for review by the Commission in August 2018

Sponsor: ProShares Capital Management LLC

Custodian: Brown Brothers Harriman and Co.

Listed Exchange: NYSE Arca

Price Data Source: Cboe and/or CME bitcoin futures

Creation Unit Size: N/A

GraniteShares Bitcoin ETF and GraniteShares Short Bitcoin ETF

File Date: January 2018

Status: Rejected at staff level but appealed for review by the Commission in August 2018

Sponsor: GraniteShares Advisors LLC

Custodian: Bank of New York Mellon

Listed Exchange: Cboe BZX Exchange

Price Data Source: Cboe bitcoin futures

Creation Unit Size: N/A

Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares

File Date: February 2018

Status: Rejected at staff level but appealed for review by the Commission in August 2018

Sponsor: Direxion Asset Management LLC

Custodian: Bank of New York Mellon

Listed Exchange: NYSE Arca

Price Data Source: Cboe and CME bitcoin futures exchange

Creation Unite Size: Basket of 50,000 shares

Other Info: Direxion’s ETFs would give investors the option to short bitcoin as well as giving them a 200% short leveraging option and a 125%, 150% and 200% long leverage option — they are the only ETF filing that accommodates leveraged shares.

VanEck SolidX Bitcoin Strategy (refiling)

File Date: June 2018

Status: Pending

Sponsor: SolidX Management LLC

Custodian: The Bank of New York Mellon

Listed Exchange: Cboe BZX Exchange

Price Data: MVIS CryptoCompare Bitcoin Index (MVBTC)

Creation Unit Size: Basket of 25 shares

Other Info: ETF is backed by physical bitcoin, but they will be redeemed in cash

Winklevoss Bitcoin Trust (refiling)

File Date: June 2018

Status: Rejected July 2018

Sponsor: Winklevoss Bitcoin Trust

Custodian: Gemini Exchange

Listed Exchange: Cboe BZX Exchange

Price Data Source: Gemini Exchange

Creation Unit Size: Basket of 100,000 shares

Bitwise HOLD 10 Cryptocurrency Index Fund

File Date: July 2018

Status: Pending

https://www.sec.gov/Archives/edgar/data/1746379/000149315218010390/forms-1.htm

Sponsor: Bitwise Investment Advisers, LLC

Custodian: N/A

Listed Exchange: TBD

Price Data Source: Bitwise’s HOLD 10 Cryptocurrency Index

Creation Unit Size: Basket of 25,000 shares

Other Info: Unlike other ETFs, Bitwise’s would be based on the 10 cryptocurrencies in its index fund, not just bitcoin.

The Winklevoss Standard and the Rationale for Rejection

The Winklevosses were the first to try and first to fail at filing a bitcoin ETF. Naturally, they set a precedent for other contenders to follow, as subsequent filings were submitted with the frontrunner’s shortcomings in mind. For the SEC, the Winklevosses’ first attempt has become something of a touchstone to evaluate the worth of those that came after it, as the first rejection order is cited in every rejection order the SEC has issued since.

And that’s because the SEC keeps running into the same problems.

In sum, these problems are few and simple. You could boil them down to three interconnected areas of concern: risk of fraud/manipulation, market size and lack of regulation.

To create an ETF for a new asset, applicants must propose a rule change to accommodate that asset in the SEC’s legal framework, and this places the onus on the applicant to prove that the asset and its underlying market are consistent with regulations laid out in the Security and Exchange Act of 1933.

As the rejection would indicate, the Winklevosses’ preliminary attempt wasn’t convincing enough to the SEC.

“[The] Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.

“The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated,” the order reads.

SolidX’s first crack at an ETF would be scrapped with the same verbiage, word for word, nearly three weeks following the Winklevosses’ rejection.

In 2013, when the Winklevosses’ ETF was filed — and in 2017 when it was summarily rejected — there were no federally regulated markets for bitcoin. Of course, the Winklevosses’ own Gemini Exchange is regulated via the New York State Department of Financial Services through one of the much-coveted BitLicenses. But the scale of this regulation is inconsequential to the SEC, so the twins’ first application was fighting a losing battle from the start.

Though by June 2017, they found an opening. The Cboe and CME exchanges launched the world’s first institutional bitcoin futures in December of 2017. By proxy, these were also the first fully federally regulated bitcoin products to trade in the United States.

So the Winklevosses took another stab at it, submitting a revised proposal and petition for review. This time around, the twins’ Gemini Exchange entered into a surveillance-sharing agreement with Cboe’s bitcoin futures market to appease the SEC’s request in the former rejection. As the name suggests, a surveillance-sharing agreement is a self-regulatory accord struck between two or more marketplaces in the same market to police fraud and manipulation. Sharing data and monitoring practices between Gemini and Cboe, then, would seemingly satisfy the SEC’s major concern with the prior application.

Still, the SEC was not impressed. In their filing, the Winklevosses et al. argue that the bitcoin market’s global nature makes bitcoin resistant to conventional mark manipulation tactics. Ironically, this argument backfired, as the SEC found that because of this global market, the Winklevoss Bitcoin Trust couldn’t possibly shield their potential investors from fraud, especially when you consider that the Gemini Exchange (which would source the ETF’s price data) accounts for a sliver of bitcoin’s daily transaction volume.

“BZX has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices,” the rejection reads.

Looking Toward the “Futures”

The rejection rationale detailed above would be copy-pasted practically verbatim into the nine rejection orders that would come in the following month, August 2018.

These filings by Direxion, ProShares and GraniteShares, however, didn’t source their price data from the underlying spot market. In fact, the contracts weren’t for physical bitcoin at all — they would be ETFs for bitcoin futures themselves.

The logic here is pragmatic if not a little obvious. Seeing as the Winklevosses were rejected a second time even if they entered into a surveillance-sharing agreement with a regulated exchange, they must have not gone far enough. If the SEC is worried about the regulation status and integrity of the market, then the ETF (and its pricing data) must be based on a regulated market, not just surveillance-share with it.

So Direxion, ProShares and GraniteShares followed in VanEck’s footsteps, which was the first to file for an ETF based on bitcoin futures, bizarrely, before a mainstream futures market even existed (this is why its proposal was initially withdrawn at the SEC’s request).

Unlike its counterpart in physical bitcoin ETFs, these products would divide shares of the Cboe’s and/or CME’s futures contracts, while naturally sourcing pricing data from these markets as well.

These ETFs all claim to have established a surveillance-sharing agreement with the CME’s and Cboe’s regulated futures markets. Even so, these agreements must be with a “market of significant size related to bitcoin,” and in the eyes of the SEC, the CME and Cboe aren’t there yet.

“While CME and [Cboe’s CFE] are regulated markets for bitcoin derivatives, there is no basis in the record for the Commission to conclude that these markets are of significant size,” the rejection notices read.

“Publicly available data show that the median daily notional trading volume, from inception through August 10, 2018, has been 14,185 bitcoins on CME and 5,184 bitcoins on CFE, and that the median daily notional value of open interest on CME and CFE during the same period has been 10,145 bitcoins and 5,601 bitcoins, respectively,” it continues.

With this data in mind, the SEC then says that extrapolating any “meaningful analysis” from this market volume is difficult “because reliable data about the spot market, including its overall size, are unavailable.”

Of course, these rejections were made at the staffing level and are pending review by the Commission itself, so while the staff’s decision doesn’t exactly inspire confidence, it could still be overturned by the SEC’s senior decision makers.

Precedents and Disappointments

Almost all arguments against these ETFs make their way back to the spot market.

If the ETF prices its data from spot exchanges like Gemini, these markets are too small in the scope of bitcoin’s global trading to definitively defend against fraud. If the ETF prices its data from a regulated derivatives market, there’s no reliable way to measure the significance of this future’s volume against the overall market.

The SEC’s gravest concern when deliberating bitcoin ETF approvals has been related to fraud and manipulation; market size, asset liquidity and reliability of pricing data are also wrapped up in this primary concern. And these concerns don’t even touch on the custody and settlement difficulties offerings would have to hurdle if they redeemed shares “in-kind” with bitcoin itself (there’s a reason most (if not all) of the filings since the Winklevosses’ own have opted to settle contracts in cash, instead).

Ironically, the biggest obstacle to regulating an ETF into existence, then, is the current dearth of regulated entities and structures in the bitcoin market at large. In an interview with Bitcoin Magazine, SEC Commissioner Hester Peirce hit on the catch-22 that the SEC’s rejection creates, as well as explaining that she feels their rejections set a disconcerting precedent for the SEC’s power to vet or denounce the quality of an investment.

“If you really want this market to be more orderly,” she said, “then you’ve got to let some of these forces in that are going to bring order to it,” like an institution-grade product such as an ETF.

Peirce suggested that the rejection of the Winklevoss ETF in particular set a poor precedent. “It plays into a bit of a thread in securities regulations — at the federal and at the state level — which is that there’s an inclination among regulators to almost step into the shoes of the investor and say whether or not the investor should be making that particular decision, based on our assessment of the actual product — in this case, the actual asset. So yes, that is a disturbing precedent, because I can’t make assessments about those things,” she said in the interview.

So far, ETF news has been punctuated by overarching disappointment, but a number of decision-pending files are still crowding the SEC’s desk. As we mentioned earlier, currently, the ETFs pitched by Direxion, ProShares and GraniteShares are up for review by the Commission; VanEck and SolidX’s joint effort, as well as Bitwise’s sweeping ETF of popular coins, are still being reviewed.

This September, Abra’s CEO Bill Barhydt told CNBC that he would bet on an ETF being approved “in the next year,” and Peirce said she was “a bit optimistic” that one is coming. Barhydt believes the right suitor hasn’t called on the SEC yet, but that once it does, the ETF is inevitable, while Peirce thinks that there’s enough interest in the product for an eventual approval.

Until this eventually becomes reality, though, the industry is stuck waiting on what the SEC will do next — something that’s become a constant for 2018 and isn’t likely to change anytime soon.

This article originally appeared on Bitcoin Magazine.

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China’s Central Bank Wants to Put the Damper Airdrops: Report

airdrop china

The People’s Bank of China (PBoC), China’s central bank, has its eyes on cryptocurrency companies that run airdrop campaigns in the country.

In its most recent financial stability report for 2018, which was published on Friday, November 3, 2018, the bank said there has been a surge in the number of “disguised” Initial Coin Offerings (ICO), including the free distribution of crypto tokens through airdrops, despite its effort to clamp down on their activities.

Based on the report, the bank states that the companies running token giveaways are evading China’s blanket ban on ICOs by issuing free tokens to the investor, while keeping a large chunk of the total supply for speculation on a crypto exchange, where speculation would drive the prices up so they can profit.

Last year, the central bank banned ICOs, calling them “illegal fundraising” that were targeting innocent investors. According to the PBoC report, before the ban took effect, 65 ICOs had been completed up until July 18, 2017, while only five were launched before 2017. This sudden jump also attracted over 105,000 investors who contributed a total of about 2.6 billion yuan ($377.3 million), a figure, the PBoC states, accounted for 20 percent of the total ICO funding raised globally by blockchain startups.

The central bank also made its concerns known about crypto firms who had moved their operations overseas but were using local agents to invest on behalf of domestic investors in China. The vice governor of the PBoC had warned foreign ICOs targeting Chinese investors at a separate event, earlier this year. He had stated at the time:

“Any new financial product or phenomenon that is not authorized under the existing legal framework, we will crush them as soon as they dare to surface.”

Not one to rest on its laurels, the PBoC said it would continue to monitor the crypto industry, coordinating with other agencies to help safeguard and protect the interest of investors.

The bank’s toughened stance with cryptocurrency began in 2013, where it published the “Notice on Precautions Against the Risks of Bitcoin,”where bitcoin was not deemed to be legal tender in China—to the most recent ban on ICOs in 2017.

Since then, there has been an onslaught of anti-crypto measures in the country. Earlier this year, commercial venues were banned from hosting crypto events, WeChat blocked some high profile blockchain related accounts, while Tencent, Baidu and Alibaba issued statements announcing restrictions put in place to limit crypto-related activities on their platforms.

This article originally appeared on Bitcoin Magazine.

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SEC’s End-of-Fiscal-Year Report Reveals Heavy Action Against ICO-Related Fraud

SEC ICO report

The U.S. Securities and Exchange Commission (SEC) has released a report detailing actions taken against fraudulent ICOs and financial ventures, and, indeed, the year has been wrought with cases. The report details actions for 2018’s fiscal year, which ended on September 30, and offers insight into the ICO-related fraud that has seemingly come to light over the past several months.

Misconduct actions against ICOs and similar cryptocurrency ventures are led by the organization’s Cyber Unit, which became fully operational this year. The SEC explains in the report, “We believe our approach to enforcement in this space has been thoughtful and consistent. Importantly, it has provided a template for authorities in other countries, where fraud and misconduct targeting U.S. investors often have been based.”

The report regards ICOs as “high-risk investments,” as many “lack viable products or established track records.” The document also says that many contain shady business models or are unable to safeguard digital assets from theft by hackers, while others are completely fraudulent and operate under the guise of garnering business capital.

Since the formation of the Cyber Unit, the SEC’s actions against cyber-related misconduct has increased heavily. In 2018, the organization brought forth 20 standalone cases related to financial fraud, 12 of which had to do with ICOs and digital assets. At the end of the fiscal year, the SEC states that it had roughly 225 cyber-related investigations occurring at once.

One of biggest cases against an ICO involved two individuals who had opened a venture known as TokenLot LLC, which they described as an “ICO superstore.” The SEC filed charges against both figures for operating as an unregistered broker-dealer and for participating in unregistered offerings, though the charges were later settled in mid-September.

The SEC also obtained an emergency order halting an ICO led by Titanium Blockchain Infrastructure Services, Inc. and its president Michael Alan Stollery, a self-described “blockchain evangelist.” That ICO raised roughly $21 million from thousands of investors, both in and out of the U.S., but the SEC became involved after it received complaints that Stollery had lied about Titanium’s business relationships with the Federal Reserve and several other established businesses including Verizon, PayPal and the Walt Disney Company. Additional complaints also claimed that Titanium’s website contained false testimonials from corporate customers.

Other instances involved the cyber intrusion of a broker-dealer and investment advisor in Iowa. The intrusion compromised the personal information of several thousand customers. The SEC charged the firm with violating the Identity Theft Red Flags Rule — also known as Regulation S-ID — which works to help protect investors against the risks of identity theft. The SEC also charged another defendant who had allegedly been manipulating prices of Fitbit securities through false regulatory filings.

The SEC acknowledges that ICOs have become a popular method of raising capital for startups and new businesses. While representatives do not wish to stifle innovation in the financial space, they have worked hard over the past several months to educate investors regarding which fundraising efforts may or may not be legitimate. Methods of informing investors include releasing public statements and enforcing trading suspensions. The SEC has also recommended enforcement actions against companies that seek to violate registration protocols or engage in unlicensed broker-dealer activity.

In addition, the SEC has implemented harder methods of fighting fraud such as the Share Class Selection Disclosure (SCSD) Initiative, which is designed to swiftly identify and remedy widespread financial violations. The SEC is now planning to enforce SCSD standards to ensure the return of substantial funds to retail investors that have been cheated by fraudulent ICOs.

To view the full report, click here.

This article originally appeared on Bitcoin Magazine.

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Hong Kong Securities Regulator Promises to Regulate Crypto Investment Funds

Hong Kong Securities Regulator Promises to Regulate Crypto Investment Funds

The Securities and Futures Commission (SFC) of Hong Kong has claimed that it will include crypto funds under its regulatory umbrella.

The SFC issued a statement on November 1, 2018, laying out its new approach for regulating virtual assets in the future. The SFC granted that there are many inherent risks in investing in a new space like cryptoassets and set out to address these risks through new regulatory action.

The statement showed a willingness to adapt the existing regulations around investing to conveniently and decisively affect crypto as well, staying away from either making these sorts of assets a specific new class of assets or attempting to discourage virtual assets altogether.

Unlike mainland China, which has displayed a certain aversion toward private cryptocurrencies, the autonomous region of Hong Kong is apparently taking a different approach. This has led many crypto companies to move out of mainland China, choosing instead to ramp up operations within the region of Hong Kong alone.

This stance of adapting the laws to include virtual assets and asset funds reflects an attitude that the economic model of investments and transactions is still fundamentally the same, with the main dangers coming from the uncertain atmosphere of new crypto markets.

In addition to releasing the statement on their general intentions, the SFC also released a circular for intermediaries on the same day. In this circular, the SFC claimed that it has “observed investors’ growing interest in funds which invest in ‘virtual assets’” and, to this end, that it wishes to provide some helpful guidance toward intermediaries.

The circular included information about how intermediaries can deal with cryptoassets and still remain compliant with existing regulations, including a series of pointers for fund managers and daily operations, information that customers are privy to and more.

From these recent releases, it appears the SFC is using its status as Hong Kong’s main financial regulator to create a crypto-friendly environment in as painless a manner as possible, and that Hong Kong will act favorably to these sorts of assets in the immediate future.

This article originally appeared on Bitcoin Magazine.

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Op Ed: 10 Takeaways From Recent French Guidance on Blockchain and the GDPR

Op Ed: 10 Takeaways

“The GDPR, and more generally the classical principles of personal data protection, were conceived in a world where the management of data was centralized within specific entities. In this regard, the decentralized model of data governance embodied by blockchain and the multiplicity of actors involved in the processing of data complicate the definition of the roles of each one.” Blockchain: Premiers éléments d’analyse de la CNIL (unofficial translation).

In late September 2018, France became the first EU member state to release official guidance on the complicated interplay between the General Data Protection Regulation (GDPR) and blockchain technology. The Commission nationale de l’informatique et des libertés (CNIL) guidance is complex and nuanced but suggests some important takeaways about blockchain GDPR compliance.

Takeaway No. 1: Users of blockchain solutions may be considered to be controllers of their own data.

The CNIL guidance identifies a category of actors termed “participants” (i.e., initiators of transactions on a blockchain) who have rights to write data to the chain and who decide to submit that data for validation by other participants (i.e., miners and “validator nodes”). Because these participants are deciding the purposes for which personal data will be processed and have chosen blockchain technology as the means for processing, the CNIL remarks that they should be considered controllers.

This part of the CNIL guidance will have a significant positive impact on various blockchain solutions — especially self-sovereign identity solutions — that seek to take control over personal data away from business entities and put it back into the hands of individuals.

Takeaway No. 2: Cryptocurrency exchanges are controllers of personal data under the GDPR.

According to the CNIL guidance, a controller will be either (a) a natural person who is processing personal data in a professional or commercial context or (b) a legal person who is writing personal data to the chain.

In a specific example, the CNIL states that “a physical person who engages in the purchase or sale of bitcoin … can be considered a controller if he conducts these transactions in the course of a professional or commercial activity, for the accounts of other physical persons.”

This statement appears to put cryptocurrency exchanges squarely within the definition of a data controller under the GDPR and likely subjects them to all obligations applicable to controllers.

Takeaway No. 3: Miners or validator nodes of blockchain transactions are processors of personal data under the GDPR.

The CNIL guidance notes that any actor merely validating transactions or writing data to the chain at another’s direction should be considered a processor. Therefore, persons or entities operating as miners or validator nodes on a blockchain will likely be considered processors of personal data.

Takeaway No. 4: Blockchain is not incompatible with the GDPR’s right of erasure.

Despite previous conjecture that a blockchain’s immutability would put it forever at odds with the right of erasure, initial guidance proposes a welcome middle ground.

The CNIL suggests that erasure of personal data stored on a blockchain might be accomplished by rendering the data “almost inaccessible, and therefore approximat[ing] the effects of erasure of the data.” Further, destroying the underlying private key or value generating the encrypted or hashed result would be “sufficient to anonymize the cryptographic commitment in such a way that it loses its quality of personal data.” Of course, in order for these techniques to be effective, personal data residing off the blockchain must be deleted as well.

Takeaway No. 5: Participants on a permissioned blockchain must designate a single data controller or risk having all participants deemed joint controllers.

Among those who might be classified as controllers on a permissioned blockchain — those entities determining the purposes for the processing and writing to the chain — the CNIL offers two options: The controllers or group of participants may either create a legal entity in the form of an association or “GIE” (Economic Interest Group), or they may choose one participant to make data protection decisions for the group and designate that entity as the controller.

If the group chooses to do neither, then each participant will be considered jointly responsible as a controller under the GDPR and must separately adhere to all applicable obligations. (The application of this concept to a public permissionless blockchain remains unclear and will likely be a subject of future guidance.)

Takeaway No. 6: Developers of smart contracts will be considered data processors when they develop smart contracts at the direction of a third party.

With regard to smart contracts, the CNIL guidance keeps open the possibility for the designers of smart contracts to be either processors or controllers, depending on the circumstances. However, the guidance provides some clarity by citing an example that directly invokes a real-life smart contracts pilot called “fizzy,” which was launched last year by global insurance company AXA.

In the example, “a software developer offers an insurance company a solution in the form of a smart contract, which allows the company to automate the compensation of passengers when their flight is delayed. This developer will be viewed as a processor by virtue of the insurance company, the controller.” The entity directing the creation and use of the smart contract will likely be deemed a controller.

Takeaway No. 7: Any business looking to use blockchain technology should carefully assess privacy considerations before going live with its solution.

Any organization building or using blockchain solutions must keep privacy compliance at the forefront — both in meeting the requirements of the GDPR and in minimizing potential for harm to individuals. Organizations should begin by considering whether a blockchain solution is truly necessary or whether the same result can be achieved by more traditional, centralized means. The CNIL wisely points out, “Blockchain is not always the best technology for all processing of data; it may be the source of difficulties for the controller with respect to its GDPR obligations.”

If blockchain technology is still preferred, the CNIL strongly encourages entities to perform a privacy-by-design analysis in advance of any processing. The regulator repeatedly recommends that developers, businesses and other actors undertake a detailed assessment of the need for recourse to blockchain technology, the privacy “pros and cons” thereof, and the way that personal data will be handled on the blockchain platform.

It is also crucial that the controller determine the need for, and if necessary conduct, a data protection impact assessment (DPIA) for each processing operation envisioned on the blockchain. The DPIA will allow the controller to later demonstrate that it has weighed and documented the risks and protections in advance of processing.

Takeaway No. 8: Permissioned blockchains should have a minimum number of nodes to protect the integrity of blockchain data.

The CNIL’s security guidance advises blockchain operators to account for the possibility of “51 percent attacks,” where actors controlling more than half the network’s computing power would be able to modify or prevent further transactions or entries on the chain. To prevent such an event, the CNIL recommends that evaluations be performed to determine the minimum number of miners needed to mitigate this risk.

Still, while it is advisable to ensure that a blockchain is adequately distributed among at least a minimum number of independent nodes, far more complex controls will be required to guard against risks related to collusion and consolidated control over those nodes.

Takeaway No. 9: Data subjects must have recourse to challenge the outcome of smart contracts — although the form this recourse should take is unclear.

The CNIL’s guidance is seemingly inconsistent on the extent to which a data subject should be able to contest the output of smart contracts.

In one sentence, the guidance appears to require that data subjects be able to intervene in smart contracts, stating that a “data subject should be able to obtain human intervention, to express his point of view and contest the decision, after which the contract may be executed.”

In the very next sentence, the guidance appears to state that it is sufficient to allow a data subject to challenge a smart contract after execution, stating that it is “appropriate that the controller provides for possibility of human intervention that allows … the data subject to challenge the decision, even if the contract was already executed.”

Perhaps the only thing that is clear is that in scenarios where smart contracts process personal data, the data subject should have some level of recourse to challenge the outcome of the smart contract transaction.

Takeaway No. 10: There will be “right” and “wrong” ways to use blockchains from a privacy and security perspective, and more guidance is forthcoming.

On October 3, 2018, the European Parliament passed a resolution titled “Distributed ledger technologies and blockchains: building trust with disintermediation.” The resolution, which acknowledges distributed ledger technology as “a tool that promotes the empowerment of citizens by giving them the opportunity to control their own data,” makes recommendations to member states encouraging adoption and best practices of blockchain platforms.

Both the EU resolution and the release of the CNIL’s guidance send a strong signal that the EU will not, as some have feared, decree blockchain technology to be fundamentally incompatible with the GDPR. To the contrary, these official actions indicate an acute awareness of the advantages of blockchain technology and a willingness to work with industry to increase adoption, so long as participants understand that there may ultimately emerge right and wrong ways to “do blockchain” from a privacy perspective.

This is a guest post by Laura Jehl, Robert Musiala, Stephanie Malaska of BakerHostetler. Views expressed are those of the authors and do not necessarily reflect those of BakerHostetler. its clients, Bitcoin Magazine or BTC Inc.

Robert A. Musiala Jr. is BakerHostetler’s Blockchain Counsel. His practice includes advising blockchain industry clients that have previously completed “initial coin offering” events on strategies for mitigating personal and business risk, limiting business disruption and achieving regulatory compliance.

Stephanie Malaska, an associate with the firm, focuses her developing litigation practice on international disputes and related cross-border issues.

This article originally appeared on Bitcoin Magazine.

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Coinsource Receives BitLicense to Operate Bitcoin ATMs in New York

Coinsource bitlicense

Bitcoin ATM Operator Coinsource has been granted a BitLicense by the New York Department of Financial Services (NYDFS).

Based in Texas, Coinsource deploys Bitcoin ATMs to key population centers across the world with over 200 machines installed in the U.S. alone.

CEO of Coinsource Sheffield Clark called the announcement a “landmark day for Coinsource” and an “important win for New Yorkers” in a statement.

In an interview with Bitcoin Magazine, Clark noted that he sees the “license as validation of not only our tireless efforts to offer Americans easy, convenient access to an evolving global financial system, but also progress in the acceptance and legitimization of bitcoin as a valuable currency.”

The virtual currency license from the NYDFS will allow Coinsource to conduct business with customers and companies based in the state. Additionally, New York-based businesses will also be able to use Coinsource’s ATM kiosks to buy and sell bitcoins instantly.

Formulated in 2015, BitLicense approvals have been among the most difficult credentials to procure for virtual currency businesses seeking to operate in New York. The set of rules was developed by the New York Department of Financial Services to govern digital currency businesses operating in the state.

CoinSource becomes the first Bitcoin ATM operator and the 12th company overall to receive a BitLicense from the New York regulator, joining other crypto-related businesses such as Genesis, Square, Coinbase, bitFlyer, Circle and others.

Before receiving its BitLicense, Coinsource had operated under a special DFS provisional license in the state.

According to Clark, the license took over three years to obtain; Coinsource had applied for it back in August 2015. Having now received it, Clark says the company feels excited to have been granted such a “prestigious license.”

“We are extremely honored to receive this recognition from the state of New York and applaud the state for its dedication to ensuring cryptocurrency companies are regulated appropriately.”

He also spoke about the growth in the demand for Bitcoin ATMs in the country, which he noted surpassed the expectations of the firm. Notwithstanding, the ATM operator’s immediate focus is to grow domestically as it expands its presence to all the 50 states in America.

“Aligning with blockchain’s decentralized nature, Coinsource focuses on allowing any person, no matter what their socio-economic status is, technological know-how, or where they are based, access to our generation’s most important innovation,” he concluded.

This article originally appeared on Bitcoin Magazine.

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Indian Officials Consider Ban on “Private Cryptocurrencies”

India crypto ban

Agents of the Indian government have met to formally discuss a possible ban on private cryptocurrency holdings in the nation.

On October 30, 2018, the Financial Stability and Development Council (FSDC) issued a press release detailing their recent meeting where they “reviewed the current global and domestic economic situation and financial sector performance.”

The council seemed deeply concerned about “the need for identifying and securing critical information infrastructure,” under the guise of “strengthening security in the financial sector.”

To this end, the report mentioned a deliberation “on the issues and challenges of crypto assets/currency, and was briefed about the deliberations of the High-Level Committee … to devise an appropriate legal framework to ban use of private cryptocurrencies in India and encourage the use of distributed ledger technology.”

It should be noted that the council appears to refer to “private cryptocurrencies” as coins that operate on an open-source, permissionless blockchain, and this classification should not be confused with privacycoins, a subset of cryptocurrencies that focus on anonymous transactions.

This stance on the different applications of blockchain technology seems to be an unfortunately common one across different major economies worldwide. Earlier this year, China began to make public its support for the applications of distributed ledger technology, while continuing to remain either silent or generally negative on the prospects of a truly decentralized currency.

The Indian government has recently shown several indicators of a growing hardline stance on cryptocurrency, with the Reserve Bank of India (RBI) banning crypto exchanges in July 2018, and the proprietor of a Bitcoin ATM in Bangalore being arrested in late October.

Other than these general trends in Indian policy, however, crypto speculators abroad have little to go on. The FSDC’s report did not elaborate on their intended meaning of “use,” or whether this means a proposed ban on trading, holding, mining or any other possible interactions with cryptocurrency networks.

It is unclear the extent to which the Indian government will clarify its overall intentions toward cryptocurrency in the days to come.

This article originally appeared on Bitcoin Magazine.

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IRS Advisory Committee Requests Clearer Guidance for Crypto Tax Code

IRS Advisory Committee Requests Clearer Guidance for Crypto Tax Code

On October 24, 2018, an advisory committee to the Internal Revenue Service (IRS) published a report calling for clarity on the IRS’s position toward cryptocurrency taxation.

The Information Reporting Program Advisory Committee (IRPAC) recently released its annual report advising the IRS on possible areas to improve the tax code, specifically referring to data gathered throughout the fiscal year of 2018.

In this 95-page report, multiple sections are dedicated to the issue of cryptocurrency taxation, with the IRPAC specifically recommending “that the IRS issue further guidance on the information reporting and withholding implications of cryptocurrency transactions.”

Cryptocurrency tax policy has been a headache for investors, as the IRS regards each trade as a taxable event akin to realizing gains on an investment. Perhaps due to the abstruse nature of the tax code and the inherent complexities that come with reporting each trade, few investors reported their gains for the 2017 tax year.

In the report’s overhead, the IRPAC specifically credits the IRS’s Notice 2014-21 for acknowledging that virtual currency is still treated as property in the eyes of the federal government’s capacity to levy taxes.

Nevertheless, the report claims that the rise of cryptocurrency has raised further questions about the tax regulations around the nascent asset class, including whether or not cryptocurrency is a specified foreign financial asset or if crypto transactions must follow the guidelines of broker reporting.

The report cites research from Fundstrat Global Advisors in April, which estimates that there are $25 billion in tax liabilities within the United States. The report goes on to state that “because transactions in virtual currencies can be difficult to trace and have an inherently pseudonymous aspect, some taxpayers may be tempted to hide taxable income from the IRS.”

Needless to say, such a large potential source of taxable income would be of great interest to the IRS, and the report goes on to detail several “general tax principles” that apply to property transactions, stating that these would logically apply to crypto asset transactions as well.

The report concludes the cryptocurrency section by referencing the court’s attempts to enforce a summons on Coinbase, and how this could form a useful precedent for dealing with crypto asset holders that wish to avoid federal tax agents, stating that “IRPAC would be very interested in helping develop information reporting and withholding guidance on these important issues.”

This article originally appeared on Bitcoin Magazine.

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Japanese Financial Services Authority Approves Self-Regulation for Crypto

Japanese Financial Services Authority Approves Self-Regulatory Exchange Body

Japan’s Financial Services Agency (FSA) has granted self-regulatory status to the country’s cryptocurrency industry, giving the Japan Virtual Currency Exchange Association (JVCEA) authority to oversee the space, according to a Reuters report.

The FSA approval, which was granted on Wednesday, October 24, 2018, gives the association the power to regulate the sector, safeguard customer assets, give operational guidelines, elaborate on anti-money laundering policies and provide necessary compliance guidelines for crypto exchanges in the country.

Reuters quoted an unnamed FSA official who believes the industry would grow faster if it were regulated by the companies that operate in the industry.

“It’s a very fast-moving industry. It’s better for experts to make rules in a [more] timely manner than bureaucrats do.”

The new self-regulation policy is effective immediately. Prior to the regulator’s approval, the JVCEA had drawn up a set of self-regulatory rules proposing, among other measures, a ban on the trading of privacy-centric coins, such as Monero, on crypto exchanges. Members are also considering holding deposits and government bonds to insure digital assets.

Established in April 2018, the JVCEA is an association of 16 licensed cryptocurrency exchanges in Japan, launched as a concerted effort among the exchanges to safeguard investors’ assets and regain local confidence in the industry in the aftermath of the $530 million Coincheck hack and the Zaif hack.

The association submitted a formal application to the FSA in August 2018, asking for recognition and the power to self-regulate itself.

Similar to the JVCEA, the Virtual Commodity Association (VCA) was launched by Gemini founders Cameron and Tyler Winklevoss as a self-regulatory organization that would police the U.S. virtual currency industry. The association also announced the appointment of former New York State Department of Financial Services executive Maria Filipakis as interim executive director for the association.

This article originally appeared on Bitcoin Magazine.

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Report: Cryptocurrencies Should Be Governed by Current EU Financial Laws

EU

The Securities and Markets Stakeholder Group (SMSG) has released a new report suggesting that the European Securities and Markets Authority (ESMA) recommend to the European Commission that it regulate the cryptocurrency space with existing legislation rather than instilling new rules and laws.

The report specifies that most crypto assets are covered by the Unfair Commercial Practices Directive, which regulates unfair business practices in the European Union and requires corresponding laws to be passed that incorporate it into each member state’s legal system. However, cryptocurrencies are covered only in the sense that an entity issuing a crypto asset is labeled as a business, while the person purchasing it is a consumer.

The report asks several questions about different classes (payment tokens, utility tokens and asset tokens) of digital monies to determine whether they can or should fall under present statutes. For example, does the asset in question give the owner an entitlement against the issuer? Is it transferable? Is it scarce, and how is the scarcity controlled?

In terms of payment tokens like bitcoin, the report mentions that they are not presently covered by the Markets in Financial Instruments Directive (MiFID II), which is the EU legislation that regulates firms providing services to clients linked to financial instruments like stock shares and bonds. These tokens are also not covered under the Prospectus Regulation, which governs businesses’ shareholding structures, or the Market Abuse Regulation. The report suggests that these assets bear many of the same risks as other investment objects, and thus the authors urge the EU to place these cryptocurrencies under MiFID II control.

The second class of financial assets — utility tokens — are a completely different ballgame. These currencies are not classified as investments, as they represent a doorway for investors to access a company’s products and services. Many times, utility tokens are issued through initial coin offerings (ICOs). To raise capital, a new company or startup will sell a utility token to investors, who in turn gain access to a whole new coin.

Utility tokens aren’t covered under EU financial regulations as they are not transferable and are only usable in a relationship between the user and the issuer. Thus, the report says these currencies should not be covered by MiFID II unless they are considered transferable. An example would be Filecoin, which builds and runs distributed data applications and helps build smart contracts. Thus, Filecoin has the potential to become an investment object in the future, and in this case, it would carry many of the same risks as traditional stocks.

Lastly, the report examines asset tokens, which represent physical goods and can be used to finance new business projects. They can also be used to represent the titles and transfers of goods, which are then recorded into the blockchain and enlist stronger security measures for both the receiving and offering parties.

To better understand how these tokens should be regulated, the report examines which assets are financial instruments or transferable securities. If a token offers a user financial entitlement of some kind, it bears the same features as both bonds and shares. It is thus transferable and — per the report’s suggestion — should fall under MiFID II and the Prospectus Regulation. Examples include EOS and any other ERC20-based tokens, as they can be purchased and traded via digital exchanges and are transferable between rewards programs, compatible wallets and participating merchants.

However, if the asset gives right to an entitlement but is not transferable or doesn’t give the holder any kind of decision power, it shares features with prepaid assets and therefore does not warrant financial regulation now or in the future. Examples include badges or statements about public keys.

It should be made clear that ESMA does not have the power to implement new laws and regulations regarding financial instruments like cryptocurrencies, nor can it change existing laws. Thus, the report is meant to advise ESMA on how to discuss such changes with the European Commission.

To view the full report, click here.

This article originally appeared on Bitcoin Magazine.

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Marco Santori on Airdrops and the “Complete Picture” of SAFT Regulation

Marco Santori on Airdrops and the “Complete Picture” of SAFT Regulation

Ever since the U.S. Securities and Exchange Commission (SEC) issued a stern warning about initial coin offerings (ICOs) in February 2018, cryptocurrency projects have had to consider different options for distributing their tokens — and funding their development.

One alternative for dispersing a token is an airdrop, where tokens are given out (for free) to the holders of an existing cryptocurrency. A former partner at law firm Cooley LLP has a positive view on them. “Airdrops can do no harm. In fact, we think they can make things better,” Marco Santori, who is now the president and chief legal officer at Blockchain, a bitcoin wallet provider, told Bitcoin Magazine.   

“An airdrop doesn’t get around the securities laws; but, that said, unless the thing that you’re airdropping, the token that you’re airdropping, is a security, then the airdrop is not a securities offering,” he continued. “I think they can be a powerful tool for decentralization.”

In a recent interview, Santori shared more of his thoughts on raising funds and the future of regulation.

He think an issuance framework he worked on while at Cooley called SAFT, short for Simple Agreement Future Tokens, is a useful alternative to traditional ICOs. In the arrangement, accredited investors lend money to a project with the promise that tokens will become available after the network is up and running. The SAFT white paper was published in October 2017; since then, SAFT has become a market standard.

“I think that the SAFT framework is probably the best that we have today,” Santori said. “If you layer on top of that the additional clarity that the SEC has provided in the context of Bill Hinman’s speech or the so-called ‘Hinman test’ that incorporated the SAFT framework, then you’ve got a pretty complete picture.”

Santori is referring to statements made by the SEC’s director of the division of corporation finance in June 2018. At that time, Hinman addressed the possibility that a token could begin life as a security and then convert to something other than a security when a network became sufficiently decentralized, like Bitcoin.

As far as the SEC goes, Santori doesn’t think the regulator will be handing out any further  guidance for ICO projects. “We have probably gotten all of the informal guidance we’re going to get,” he said. However, he does anticipate some “no-action” relief to start coming down the pike soon.

If a project is uncertain whether a particular activity constitutes a violation of federal securities laws, they can request a no-action letter from the SEC. If they receive a relief, no civil or criminal action will be taken against them for engaging in that activity.  

“I expect that we’ll be seeing SEC’s response to some of those requests coming out. And those responses have some precedential value — not legal precedent, but practical precedent — and we’ll be seeing some more of that,” he said.

Existing laws likely will be good enough for the regulators, Santori thinks. “The Treasury Department and FinCEN [Financial Crimes Enforcement Network], in particular, have stuck to their guns. They have said that the laws we have are enough; the rules we have are enough.”   

At the end of the day, Santori feels it will be up to courts to make the ultimate decision on whether a token is a security. “A number of lawsuits are winding their way through the federal courts today and likely private lawsuits will answer the question first,” he said.  

Of course, the SEC has to follow the law like everyone else. “The SEC is just the plaintiff, and if SEC takes one position and a defendant decides to take a different position and fight, then ultimately it’s going to be the courts that decide in a civil case whether this token sale is a security or not,” said Santori. “The SEC is a very powerful plaintiff.”

Santori will weigh in on airdrops and the future of regulating cryptocurrencies along with Brent McIntosh, General Counsel for the U.S. Department of the Treasury, at Money 20/20 in Las Vegas, October 21–24, 2018. The U.S. Department of the Treasury administers the Financial Crimes Enforcement Network (FinCEN), the regulator that punishes money launderers.

This article originally appeared on Bitcoin Magazine.

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SEC Sets Up Open Line of Communication for Fintech Projects With FinHub

SEC Sets Up Open Line of Communication for Crypto Projects With FinHub

The U.S. Securities and Exchange Commission (SEC) has launched a new office to engage with cryptocurrency and blockchain startups. Called the Strategic Hub for Innovation and Financial Technology (FinHub), the division will make it easier for fintech startups to interact with the regulator on related issues and the legal implications of products before they launch them.

Announced Thursday, October 18, 2018, FinHub will serve as the central point for entrepreneurs in the fintech world, especially groups focusing on new technologies such as blockchains, artificial intelligence, digital marketplace financing and more.

With the number of subpoenas being sent out by the agency and the expansion of its clampdown on blockchain startups that it claims have violated federal securities law, the FinHub can direct entrepreneurs and provide the much-needed clarity on the requirements needed to build compliant platforms and products.

Entrepreneurs and developers will be able to ask questions from the Hub as well as have access to the regulator’s views and actions about the fintech space. Startups can also use the portal to request for meetings with the regulator.

The Hub will be led by Valerie A. Szczepanik, the Senior Advisor for Digital Asset and Innovation in the SEC’s Division of Corporation Finance, and will be staffed with agency officials with expertise in fintech related issues.

Szczepanik said the SEC has been educating entrepreneurs for a while now but the portal will centralize the process.

“SEC staff across the agency have been engaged for some time in efforts to understand emerging technologies, communicate the agency’s stance on new issues, and facilitate beneficial innovations in the securities industry.”

SEC Chairman Jay Clayton believes the portal will provide a “central point of focus” for the agency’s “efforts to monitor and engage on innovations in the securities market.”

“The SEC is committed to working with investors and market participants on new approaches to capital formation, market structure, and financial services, with an eye toward enhancing, and in no way reducing, investor protection.”

The number of cases being pursued by the SEC and its sister agencies has increased over the years. Just last month, the SEC and the Commodity Futures Trading Commission (CFTC) filed charges against securities broker 1pool Ltd for offering security-based swaps funded with Bitcoin, which the agency says violates federal securities law.

The regulator also went after the owners of PlexCoin and issued a cease and desist order to Hedge Fund Crypto Asset Management and its founder Timothy Enneking for misrepresenting the company as the “first regulated crypto asset fund in the United States.” 

This article originally appeared on Bitcoin Magazine.

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Roubini Faces Off With Coin Center’s Van Valkenburgh at Senate Hearing

Roubini Faces Off With Coin Center’s Van Valkenburgh at Senate Hearing

Nouriel Roubini, an economist best known for his predictions of the 2008 housing bubble, and Peter Van Valkenburgh, Coin Center’s director of research, testified before the U.S. Senate Committee on Banking, Housing and Community Affairs in a hearing on cryptocurrency and blockchain on October 11, 2018.

“We need to sort through the static,” said Banking Committee Chair Idaho Republican Mike Crapo, describing a need to better understand both the opportunities and the challenges in cryptoland. The testimony comes at a time when bitcoin has lost two-thirds of its value since the beginning of the year and U.S. regulators are trying to figure out how to regulate thousands of ICOs that have flown in the face of decades old securities laws.

Roubini wasted no time in firing off his salvos. He called crypto the “mother and father of all scams and [now busted] bubbles.” Among his list of other criticisms: blockchain is overhyped; Bitcoin cannot scale and it is not decentralized; only criminals and terrorists use bitcoin; crypto is a libertarian’s dream; and utility tokens will return us to the Stone Age. “Even the Flintstones knew better than crypto — they used clamshells as their own one currency,” he said, in one bewilderingly anachronistic statement.

In stark contrast, Van Valkenburgh hailed bitcoin as “revolutionary” for its ability to function as a payment system without a trusted middleman. He referred to bitcoin’s underlying technology as a “computer science breakthrough” on par with the internet. Pointing to breaches at Equifax, Swift and DYN in the last two years, he called blockchain technology “our best hope” for secure systems.    

The two testimonies were followed by questions from senators. When asked what factors hindered a broader adoption of blockchain technology, Van Valkenburgh said actual use cases were “hard challenges” and compared blockchain technology to email in the 1970s.

“It took 20 years for those systems to be friendly enough for consumers to want to use them to send messages,” he said.

Roubini, with his usual gloominess, said no government or bank would want to use a public blockchain, because it was too risky. “The idea of decentralization is never going to fly,” he said.  

When asked for examples of how the world was better off with blockchain technology, Van Valkenburgh cited one example: In Afghanistan, a country where men control finances, a woman named Roya Mahboob was able to use bitcoin to pay her female employees.

“I don’t think the world is better off,” Roubini grimaced. He pointed to M-Pesa, a mobile money transfer service that is widely used in Kenya, as an example of a system that has transformed fintech. M-Pesa is centralized and does not use a blockchain. Van Valkenburgh called M-Pesa and WeChat, an app used for mobile payments in China, “tools for totalitarianism” because they allow governments access to user data.

The topic of crime came up several times in the hearing. Van Valkenburgh agreed with one senator’s comments that criminals are often early adopters of a new tech.

“In fact, I think if criminals aren’t using your technology, your technology is not worth anything,” Van Valkenburgh said. Bitcoin was notably used in the Silk Road, a now defunct online dark market. He also made it clear bitcoin transactions are traceable, which is how many Silk Road drug traffickers were caught and brought to justice.

When asked if bitcoin would ever move beyond five transactions per second, Roubini replied proof of work is not, and never will be, scalable.

“We can do a lot more,” Van Valkenburgh said, pointing to the Lighting Network, a layer two payment solution for bitcoin. Coin Center even has an M&M machine that is rigged to the Lightning Network, he said. It allows anyone in the Coin Center office to buy a single M&M with a tiny fraction of bitcoin.

Massachusetts Democratic Senator Elizabeth Warren asked if decentralization was an inherent property of blockchain technology. Sticking to his script, Roubini replied that it was: Due to economies of scale, single entities control a majority of the bitcoin mining. He added that the situation would only become worse with proof of stake, because oligarchs would control the majority of coins in a system.  

Senator Warren expressed concern that cryptocurrencies were an easy target for theft and a lot of small investors are being scammed through initial coin offerings. “New technologies create these new opportunities,” she said. “But if we are not careful they can follow the same old patterns — they make the rich richer and leave everyone else behind.”

The full hearing can be watched online. Roubini’s written testimony can be found here; Van Valkenburgh’s written testimony is here; his oral testimony is here.   

This article originally appeared on Bitcoin Magazine.

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SEC Obtains Emergency Court Order to Halt Questionable ICO

SEC court order

The U.S. Securities and Exchange Commission (SEC) has obtained an emergency court order issuing the stoppage of a recently planned initial coin offering (ICO) by Blockvest LLC and its founder Reginald Buddy Ringgold III, who falsely advertised that the token sale was approved by the SEC.

According to the SEC, Blockvest has repeatedly violated both anti-fraud and securities registration provisions by incorrectly claiming that its ICO had obtained regulatory approval from Commission officials. The order further states that Ringgold — who also works under the name Rasool Abdul Rahim El — was using the SEC seal without the organization’s permission.

In addition, the SEC says that Ringgold often touted the ICO as being “licensed and regulated,” and that he promoted the event through a false agency known as the “Blockchain Exchange Commission,” which used graphics similar to the SEC seal and boasted the same address as the SEC’s headquarters.

Robert A. Cohen, chief of the SEC Enforcement Division’s Cyber Unit, comments, “We allege that this ICO is using both the SEC seal and a made-up crypto regulatory authority to trick investors into believing the ICO was approved by regulators. The SEC does not endorse investment products, and investors should be highly skeptical of any claims suggesting otherwise.”

Furthermore, Ringgold is being accused of misrepresenting Blockvest’s alleged ties to the National Futures Association (NFA) and continuing to use the group’s seal on assorted documents and marketing materials, even after representatives had sent him a cease-and-desist letter requesting that he discontinue his statements regarding Blockvest’s connections with the NFA.

The order is seeking the return of any gains obtained through false or misleading tactics, along with both interest and penalties. The SEC is also working to bar Ringgold from participating in any securities offerings, including digital securities, in the future. The organization has frozen all of Ringgold’s assets, while a hearing is scheduled for October 18, 2018, to examine whether the freeze should continue and if a preliminary injunction should be issued.

The incident serves as further proof that the SEC is playing hardball in the digital asset space. Recently, the SEC — along with the Commodity Futures Trading Commission (CFTC) and the Federal Bureau of Investigation (FBI) — took firm action against 1pool Ltd., a brokerage firm based in the Marshall Islands, and its CEO Patrick Brunner. The SEC alleged that the venture was trading security swaps with customers across the globe while failing to meet the “discretionary investment threshold” required by federal securities law. The SEC is now seeking penalties and “permanent injunctions” against the company.

Previously, the SEC set a new precedent by charging smart contracts payments system TokenLot LLC with operating as an unregistered broker-dealer in what was the first case of its kind, following the release of the SEC’s DAO Report back in July of 2017. TokenLot was later made to pay nearly $500,000 in disgorgement, along with nearly $8,000 in interest fees.

The SEC also charged Crypto Asset Management LP (CAM) with operating as an unregistered investment firm and inappropriately calling itself the “first regulated crypto asset fund in the U.S.”

This article originally appeared on Bitcoin Magazine.

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Bitcoin Foundation Challenges “French BitLicense” Proposed in PACTE Bill

Bitcoin Foundation Challenges “French BitLicense” Proposed in PACTE Bill

On September 23, 2018, the Bitcoin Foundation sent a letter to the French Parliament asking that they reject a new crypto asset amendment being proposed in the PACTE Bill, which deals with the growth and transformation of France’s businesses and the country’s employee savings.

The amendment was suggested by members of France’s new social liberal party La Republique En Marche (LREM) on September 21, 2018. Should the amendment pass, it would allow the French government to adopt the recommendations of what’s known as the Landau report, a proponent of New York’s BitLicense.

Llew Claasen is the executive director of the Bitcoin Foundation. Speaking with Bitcoin Magazine, he states that the amendment is wrong for France and will leave the country behind when it comes to technological advancement in the blockchain and crypto space.

“The amendment seeks to introduce a licensing requirement for any provider of digital asset services, with digital assets being very widely defined to include any crypto asset that would not already be regulated as a financial instrument, including for non-financial use cases,” he explains.

“The licensing regime described is arbitrary and far-reaching, offering no certainty around how the regulator will determine what would be needed to get a license, keep a license or even how long it would take to get a license. Additionally, the summary suggests than an important reason for the creation of the regulations is anti-money laundering and anti-terrorist financing when there is no reason to suggest that crypto assets are used in that way at any meaningful scale.”

Claasen says that New York’s BitLicense has destroyed both fair competition and blockchain innovation within the state. He is concerned that France will experience the same results if the amendment garners majority approval.

“Since the BitLicense was introduced in New York in August 2015, only seven licenses have been issued, all of them to large, well-funded organizations,” he states. “An entire industry packed up and moved out of New York after the BitLicense was promulgated, and it will happen in France.”

Claasen is adamant that the country — and Europe, in general — doesn’t need new crypto regulation, but rather a light hand and guidance notes from regulators that describe desirable market behavior. He says blockchain technology is too new and immature, and that its final use cases and best practices are too uncertain to force it into a rigid licensing regime. He believes regulators need to spend more time understanding how the technology works before they can make any valid decisions regarding how it should be officiated.

“Most blockchain products will tend toward a decentralized, private, peer-to-peer state including the absence of a sponsor, a reporting entity or a governing body,” he states.

“Many crypto-specific regulations assume that the centralized transitionary states of these projects reflect their end state, and that these networks can be regulated in the same way that one might regulate a juridical or natural person. They can’t, even if we’d like them to be. These networks are a completely different way of coordinating economic activity that seeks to be more scalable, but we need more time to figure things out. Bad behavior by some predatory market participants should not be taken as a signal to snuff out all development in this space.”

Founded in September 2012, the Bitcoin Foundation has sought to bring top figures in the crypto community together to build awareness regarding bitcoin’s benefits, uses and requirements for global adoption, although it has been somewhat out of the spotlight in recent years. Members are now asking French cryptocurrency experts to reach out and assist in establishing the organization’s presence in the country and bring an early end to the proposed amendment.

This article originally appeared on Bitcoin Magazine.

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Brave CEO Pens Letter to Senate Committee Asking for GDPR-Like Privacy Regulation

Brave CEO Brendan Eich Pens Letter to Senate Committee Asking for GDPR-Like Privacy Regulation

Brendan Eich, the CEO of Brave, has written a letter to the U.S. Senate Committee on Commerce, Science and Transportation urging them to implement GDPR-like legislation in the United States.

GDPR stands for General Data Protection Regulation and works to secure the data and privacy of all individuals within the European Union (EU) and the European Economic Area (EEA). In addition, it addresses the exporting of personal data outside these two organizations. GDPR seeks to give individuals control over their personal information and simplify the regulatory atmosphere for international business ventures.

Based in San Francisco, Brave is a new kind of browser that allegedly offers users faster speeds and stronger security by blocking trackers and advertisements. In his letter, Eich describes GDPR as a “great leveler” and says it has allowed many new businesses in Europe to flourish by preventing larger, more established corporations from disadvantaging them.

“The GDPR’s principle of ‘purpose limitation’ will begin to prevent dominant platforms from using data that they have collected for one purpose at one end of their business to the benefit of other parts of their business in a way that currently disadvantages new entrants,” Eich writes.

“In general, platform giants will need ‘opt-in’ consent for each purpose for which they want to use consumers’ data. This will create a breathing space for new entrants to emerge.”

Eich says GDPR-like standards have been adopted in several countries around the world including China, Brazil, Japan, India, South Korea and Argentina. Together, these countries make up roughly 51 percent of the world’s overall GDP and have experienced higher levels of efficiency and innovation in their business markets.

Eich believes that should the U.S. move in a similar direction, the country can keep its competitive edge and affirm its reputation as a leading global tech hub.

Furthermore, he suggests that GDPR-like protocols will establish greater trust within the United States between businesses and customers, as it is not necessary to track people’s movements online: the main reason for doing so is simply to generate ad-based revenue from the sites customers visit. Since late 2017, approximately 615 million devices built to block ads and tracking have been activated, suggesting a growing level of unease and distrust amongst everyday consumers.

“A GDPR-like standard in the United States will establish the foundation of trust to enable innovation and growth,” he writes. “This certainly applies in our own online media and advertising industry. Contrary to some of our industry colleagues, I believe that it is not tenable for any platform, publisher, technology vendor or trade body to claim that they must track people to generate revenue from advertising … Trust will only return as the GDPR-like laws begin to curtail the online advertising industry’s worst practices.”

Tracking movements to garner ad revenue occurs through a process known as online behavioral advertising (OBA). Data is collected from all the sites a consumer visits. Ads are then selected for display to the consumer based on his or her past maneuvers. Eich says OBA occurs via several third-party networks operating quietly through “opaque processes” with no central authority to be held accountable. In other words, this is a form of “behavioral tracking,” and he questions how ethical and safe it really is.

Recently, Eich filed privacy complaints in both Britain and Ireland against internet giant Google for playing “fast and loose” with customers’ private data. In his initial complaint, Eich said that Google offers intimate data about its consumers to several hundred companies without their knowledge to auction and place ads. He claims this goes against GDPR requirements that personal data be processed in a way that all consumers remain secure.

In addition, Facebook was at the height of scandal earlier this year when it was revealed that data firm Cambridge Analytica had gathered private information on millions of social media users without their knowledge and used it for political purposes. Cases like these are suggestive that tech companies have garnered too much power, and user data is usually under threat of being compromised.

Interestingly, GDPR also offers a “right to erasure” clause, in which a subject’s collected data is immediately erased from a company’s records granted the information was gathered unlawfully, is no longer needed, or the subject in question withdraws consent for the data to be used. This could present issues for blockchain-based companies, as all information on the blockchain is recorded in real-time to ensure irrefutable evidence of transactions and other relevant data.

At the same time, one of the primary requests among investors who engage in crypto-transactions via the blockchain is improved privacy and anonymity. Heightened usage of privacycoins like Monero and Zcash are proof of this, which means statutes similar to those of GDPR could be in line with the ideologies of privacy-focused blockchains.

GDPR is based on standards the United States initially endorsed back in 1980 through legislation known as the OECD Guidelines on the Protection of Privacy and Transborder Flows of Personal Data. This legislation included a definition of the term “personal data” similar with that offered by GDPR. Also, the Federal Trade Commission (FTC) has been fighting for GDPR-like features for over 10 years.

Brave as a company stands to gain little, if anything, directly from GDPR-like legislation being implemented in the United States. While the Brave browser protects user privacy and restricts advertisements, GDPR-like legislature would simply push forward what Eich and his company already believe: users deserve privacy over their online data. Eich’s letter reiterates that societies around the world are shifting toward a paradigm with a level playing field on the internet and that the United States should follow suit.

Image credits: CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=1224378 and Darcy Padilla – CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=31783773

This article originally appeared on Bitcoin Magazine.

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Crypto Task Force Bill Passes House of Representatives, Moves to Senate

Crypto Task Force

A bill that seeks to create a task force to combat the use of cryptocurrency in financing terrorism has just passed the House of Representatives. House Resolution 5036 (H.R.5036), which purports to establish the “Independent Financial Technology Task Force,” was sent to the House of Representatives on Wednesday, September 26, 2018, before it passed an unanimous voice vote and has now moved to the Senate for consideration.

The proposed bill, which was introduced by Representative Ted Budd, is seen as a positive move from U.S. lawmakers, which aims to mitigate the use of cryptocurrencies in terrorist financing. The task force would focus on researching the ways in which terrorism could be financed through cryptos and propose actions to curb such activity.

In addition to the creation of the task force, the bill would also support the development of tools and programs to detect any illicit use of cryptocurrency.

Public records from Congress indicate that the bill was passed by the House without contention. Seeing as the vote was unanimous and the bill wasn’t a controversial one, the motion to reconsider was laid upon the table and gavelled out, so it will now procede to a vote in the Senate.

In addition to having federal law enforcement studying cryptocurrencies and how terrorists are exploiting them, the bill also proposes rewards for those who provide information that leads to the conviction of those involved in crypto terrorism financing. These rewards will be paid out from the funds seized from convicts, as well as from related fines and forfeitures.

H.R.5036 is seen by many as a more robust version of another cryptocurrency-related bill. Released earlier last year, the House of Representatives introduced the “Homeland Security Assessment of Terrorists Use of Virtual Currencies Act” which seeks to make a proper threat assessment on the use of cryptocurrencies by terrorists.

One of the talking points of the Act is the way it defines virtual currencies. It defines virtual currencies as any digital representation of value functioning as a medium of exchange, store of value or a unit of account. This broad definition includes bitcoin, ether, a virtual debit card and even a Paypal balance.

Clarification: An earlier version of this article mistakenly claimed that the bill would not procede to the Senate due to a point of procedure. The error has been corrected.

This article originally appeared on Bitcoin Magazine.

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U.S. Congressman Drafts Blockchain Development Bills

Congress Blockchain Bills

The newly elected co-chair of the Congressional Blockchain Caucus, U.S. Representative Tom Emmer, has introduced a trio of blockchain-focused bills in support of the development and use of blockchain technology and digital assets. According to an official announcement, the bills focus on fostering government support for the blockchain space, clarifying money transmitter regulations and devising a tax scheme for hard forked assets.

A statement from Emmer reads in part:

“The United States should prioritize accelerating the development of blockchain technology and create an environment that enables the American private sector to lead on innovation and further growth.”

He went on to add that legislators need to do more by “embracing emerging technologies” and providing the regulatory framework needed for these technologies to succeed in the U.S.

Resolution Supporting Digital Currencies and Blockchain Technology

The first bill expresses support for blockchain technology and calls for a “light-touch regulatory approach” so it can flourish. The bill also highlights some of the benefits of blockchain technology and cryptocurrencies, such as how it enables value transfer between users and the provision of financial services to those underserved by the traditional financial sector.

Blockchain Regulatory Certainty Act

The second bill focuses on cryptocurrency miners, and clarifies who needs to register as a money transmitter in the U.S. The bill designates miners and multisig-wallet providers as blockchain entities that don’t require a money transmitter license to operate in the United States as they don’t control consumer funds.

Safe Harbor for Taxpayers with Forked Assets Act

In the absence of regulatory guidelines, the third and final bill seeks to create a “safe harbor for the tax treatment of hard forks of convertible virtual currency.” The bill would shield taxpayers from being levied any fine by the Internal Revenue Service (IRS) until such time as the IRS provides clear guidance on how such gains should be reported.

Emmer’s proposals are the first blockchain-related bills to call for regulatory clarity and greater legislative engagement with the industry, and they come on the heels of Emmer’s being named co-chair of the Congressional Blockchain Caucus, alongside fellow Representative Bill Foster.  The Congressional Blockchain Caucus is a bipartisan group of pro-blockchain legislators “who believe in the future of blockchain technology, and understand that Congress has a role to play in its development.”

This article originally appeared on Bitcoin Magazine.

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VanEck/SolidX ETFs Delayed Again as SEC Seeks Comment on Fund Proposal

VanEck/SolidX ETFs Delayed Again as SEC Seeks Comment on Fund Proposal

The U.S. Securities and Exchange Commission (SEC) has once again postponed a decision on the application for a Bitcoin Electronically Traded Fund (ETF) by VanEck and SolidX, in what is the latest update in a protracted regulatory process that has dragged on for several months. The agency has stated that it needs more time to consider more input to help it arrive at a decision on the matter, which was originally postponed to September 29, 2018.

The Long Wait for an ETF

Despite the huge market appetite for a bitcoin ETF, which would enable investors to effectively invest in bitcoin without actually holding the asset and risking exposure to its unique security challenges, the SEC has so far rejected or deferred a decision on every application for a bitcoin ETF. Earlier, the commission rejected a series of applications by a number of organizations including Gemini, the exchange owned by Cameron and Tyler Winklevoss.

The commission also recently halted U.S. trading of Tracker One’s Swedish ETF, as it seeks further consultations and comments on VanEck’s listing request.

Thus far, the SEC has received over 1,400 comment letters about the proposal by VanEck and SolidX to front an ETF, but the agency is open to receiving even more feedback, according to a filing published on Thursday. The filing states that those who wish to comment on the application have 21 days after the SEC’s order is published in the Federal Register, while those who wish to make rebuttals have 35 days from that date.

The SEC’s major hangup about a bitcoin ETF remains the capacity, or lack thereof, of the crypto market to surveil itself and prevent manipulation effectively. To this end, the body is seeking views from the public about the possible impact of a bitcoin ETF on market manipulation, including whether an ETF is more or less vulnerable to price manipulation than other assets and commodities that form the basis for exchange-traded products.

It will be recalled that, recently, a number of crypto industry heavyweights including a consortium of exchanges led by Winklevoss-owned Gemini started up an initiative aimed at demonstrating that crypto markets have come of age and are capable of effectively policing and surveilling themselves.

This article originally appeared on Bitcoin Magazine.

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Congressional Committee Calls for Clearer Crypto Tax Code in Letter to IRS

IRS letter

In an open letter to the Internal Revenue Service (IRS), the U.S. House’s Committee on Ways and Means argues that the tax collection body is leaving investors in the lurch with its vague cryptocurrency tax codes.

Authored by congressional representatives Kevin Brady, Lynn Jenkins, Darin LaHood, David Schweikert and Brad Wenstrup, the letter, addressed to Acting Commissioner David Kautter, calls on the IRS to devise a more concrete cryptocurrency taxing scheme than the one it currently enforces.

Opening with reference to a similar letter the Committee sent to the IRS on May 17, 2017, the lawmakers opine that, more than a year later, the IRS has done little to guide taxpayers through the process of paying capital gains taxes on their cryptocurrency investments, even though it’s been ramping up enforcement all the while.

“… the IRS continues to expand its enforcement activities without issuing any further guidance for taxpayers. We, therefore, write again today to strongly urge the IRS to issue updated guidance, providing additional clarity for taxpayers seeking to better understand and comply with their tax obligations when using virtual currencies,” the letter reads.

It continues to argue that, since the inception of bitcoin, the IRS has “struggled” to formulate a taxation strategy to accommodate cryptocurrencies. Noting that the agency said cryptocurrencies would be taxed as property in 2014, something the IRS Commissioner at the time called “preliminary guidance,” the lawmakers claim that “to date, the IRS has not issued any additional guidance that taxpayers may rely upon to better understand their tax obligations.”

And the legislators state that they are not alone in their concerns. Since 2016, the letter indicates, multiple organizations have contributed to the conversation, alluding to calls-to-action by The Association of International Certified Professional Accountants, the American Bar Association and the Treasury Inspector General for Tax Administration for the IRS “to develop a comprehensive virtual currency tax strategy.”

The authors state that the IRS, despite lack of a clear strategy, has made cryptocurrency taxation a focal point of enforcement. In 2016, for instance, the agency issued Coinbase a John Doe Summons to collect information on nearly half a million Americans who invested in cryptocurrencies from 2013 to 2015. In addition to this action, in July of 2018, it launched a campaign to target those who have not complied with its mandates.

By failing to help investors properly navigate new ground, the letter draws the conclusion that the IRS “severely hinders taxpayers’ ability to [comply].” As such, it calls for “the IRS to expeditiously issue more robust guidance clarifying taxpayer obligations,” arguing the agency has had “more than adequate time” to do so.

In its final paragraphs, the letter requests that the agency provide the Committed additional information toward this end no later than October 17, 2018. It also states that the Committee will request the Government Office of Accountability to audit the situation to glean a better understanding of the matter.

This article originally appeared on Bitcoin Magazine.

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“Someone’s Got to Be the Voice of Reason” — Kraken Responds to NY AG Report

“Someone’s Got to Be the Voice of Reason” — Kraken Responds to NY AG Report

The New York Attorney General’s office has pointed a finger at cryptocurrency exchange Kraken for “potential” violation of state regulations. Now, the San Francisco–based exchange is firing back, saying it does not appreciate what it sees as implications of illegality.

“Someone has to be the voice of reason,” Jesse Powell, Kraken’s outspoken co-founder and CEO, told Bitcoin Magazine. “If we all accept corrupt practices as the norm, without saying anything out of fear of unlawful retaliation, what the hell are we doing this for?”

In April 2018, as part of its Virtual Markets Integrity Initiative, the New York Attorney General’s office sent out a voluntary questionnaire to 13 exchanges as part of a “fact-finding inquiry.” Kraken and three other exchanges chose not to respond.

“If you want to talk to us, ask us for a phone call, fly yourself out to San Francisco, invite us for lunch at your office,” Powell said.

Fast-forward five months and the New York Attorney General’s office has now issued its report on the results of the questionnaire. Within the report is a paragraph stating that the office has “referred Binance, Gate.io, and Kraken to the Department of Financial Services for potential violation of New York’s virtual currency regulations.” The implication was that Kraken could still be allowing New York residents to trade on its platform without a proper license.

Three years ago, New York instituted a requirement that any company dealing with cryptocurrency in the state must have a BitLicense. Rather than apply for one, Kraken, based in New York at the time, hit the road, calling the law “a creature so foul, so cruel that not even Kraken possesses the courage or strength to face its nasty, big, pointy teeth.”

Now, safely tucked 3,000 miles away in the Bay State, Kraken still feels haunted by the Big Apple.

After reading the New York Attorney General’s entire 42-page report, Powell asserts that there isn’t “any mention of evidence that we are still doing business with NY residents.” (In fact, the report mentions Kraken only twice, both times on page 2.) Instead, it appears that the New York Attorney General is tossing the matter over the wall to the New York State Department of Financial Services (NYDFS) to see if they can come up with anything.

Powell doubts they will. “We recently spoke to NYDFS; they are aware we are not serving New York,” he said.

Kraken uses a five-tiered system to identify clients. Tier 0, verified by email only, lets clients enter the site and poke around. If clients want to trade cryptocurrency, per Tier 1 requirements, they have to supply “full name, date of birth, country and phone number.”

At Tier 1, the exchange “does not collect identity documents,” Powell says, but it does do other checks, like look up a person’s IP address to deduce their location and verify phone and address. “If any of our checks fail or our info indicates that the user is in a prohibited geo, they are required to provide identity documents and undergo enhanced scrutiny,” he said.

Powell think the Attorney General’s report was good in that it highlighted important questions consumers should be asking exchanges. However, he thinks calling out the exchanges who chose not to respond to the questionnaire unnecessary.

“After all,” he said, “there are hundreds more exchanges which were never asked and are not named.”

Regulatory clarity in the U.S. is important to the growth of the cryptocurrency industry — as long as that regulation is reasonable, he said. “We operate in a global market and regulators must be careful not to stifle domestic business while giving foreign businesses a competitive advantage.”

As for Kraken, Powell claims his exchange operates with high standards. “Much of what the regulators imagine should be done is already being done voluntarily,” he said. “We push back only where we have a strong view that the regulator is getting the issue wrong, and where the consumer might actually be put in a worse position, or where a government agency is dramatically overstepping bounds.”

Powell summed up: Although Kraken is happy to work with regulators and law enforcement, “we will not stand by silently while rights are trampled on.”

Regardless, calling out regulators, who tend to wield a lot of power in the space, is a bold move for an exchange contemplating listing 1,600 new coins.

This article originally appeared on Bitcoin Magazine.

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Cryptocurrency Exchanges Fall Short in Safeguarding Funds: Report

Crypto Exchanges Fall Short in Safeguarding Funds: Report

In April 2018, former New York Attorney General Eric Schneiderman sent off inquiries to more than a dozen cryptocurrencyexchanges to learn more about their internal operations. Now, after months of investigation, the New York Attorney General’s office has made its findings public.

A report titled “Virtual Markets Integrity Initiative,” released on Tuesday, September 18, 2018, confirms what many already know to be true: Many cryptocurrency exchanges do not have proper consumer protections in place and are often targets for market manipulation.

The questionnaire originally went out to 13 crypto exchanges. Ten voluntarily complied with the study, but four did not respond, arguing they did not serve customers in New York. But, after investigating three of those non-responders — Kraken, Binance, and Gate.io — the New York Attorney General’s office “referred Binance, Gate.io, and Kraken to the Department of Financial Services for potential violation of New York’s virtual currency regulations.”

Kraken, the only one of the four based in the U.S., was the most vociferous in its refusal to respond to the inquiry, calling the initial request “ill-prepared” and “an overly broad fishing expedition that asks questions irrelevant to the stated objective and misses obvious questions that actually would be helpful.”

Report Highlights

The report highlights three broad areas of concern.

First, exchanges dabble in several lines of business that would normally be carefully monitored in a traditional trading environment. Platforms often simultaneously offer a venue of exchange, perform a role similar to broker-dealers, and act as money transmitters. At the same time, many also have their own large crypto holdings and even issue their own cryptocurrencies.

“Each role has a markedly different set of incentives, introducing substantial potential for conflicts between the interests of the platform, platform insiders and platform customers,” the report states. As an example, the report points out that exchange employees often trade on their own platforms, even though they may have access to information about future trades or upcoming coin listing.

Second, the report claims that many exchanges make little or no effort to halt abusive trading activities. “Platforms lack robust real-time and historical market surveillance capabilities, like those found in traditional trading venues, to identify and stop suspicious trading patterns,” the report says.

What is more, there is often no way to monitor suspicious trading across multiple platforms, and “few platforms seriously restrict or even monitor the operation of ‘bots,’” the report states. “Those factors, coupled with the concentration of virtual currency in the hands of a relatively small number of major traders, leave the platforms highly susceptible to abuse.”  

Finally, the report argues that safeguards for customers funds are “often limited or illusory.” Exchanges lack a consistent approach to third-party audits that serve to show that exchanges own the coins or fiat money they claim to hold. “That makes it difficult or impossible to confirm whether platforms are responsibly holding their customers’ virtual assets as claimed.”  

Concerns over market manipulation in cryptocurrency exchanges have been popping up again and again. In thinly traded markets, it becomes very easy for so-called “whales” or large holders to move the price of bitcoin, or any cryptocurrency, in whatever directly they want.

The report comes at a time when the U.S. Justice Department is investigating crypto market manipulation, and the Securities and Exchange Commission (SEC) has rejected numerous bids for bitcoin exchange-traded funds (ETFs) on the basis that cryptocurrency markets are simply too vulnerable to fraud and manipulation.  

This article originally appeared on Bitcoin Magazine.

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Two-for-One: SEC Slaps Crypto Hedge Fund, Broker With Registration Failures

SEC twofer

In what it deems a first for both enforcement actions, the United States Securities and Exchange Commission (SEC) is charging two entities with registration failures.

First in line, TokenLot LLC, the self-named “ICO Superstore,” is being charged with acting as an unregistered broker-dealer in the “first case charging unregistered broker-dealers for selling digital tokens after the SEC issued The DAO Report in 2017.” A seminal document in defining ICOs and tokens as securities, the DAO Report was released in July of 2017 and classified DAO tokens as unregistered securities following the infamous 2016 hack.

In “its first-ever enforcement action finding an investment company registration violation by a hedge fund manager based on its investments in digital assets,” the SEC has also charged Crypto Asset Management LP (CAM) with operating as an unregistered investment company while falsely branding itself as the “first regulated crypto asset fund in the United States.”

CAM and its sole manager Timothy Enneking reportedly raised over $3.6 million in 2017 by providing illegal investment management services. The company also facilitated “an unregistered non-exempt public offering” and invested roughly 40 percent of its funds in cryptocurrencies, but, upon facing action from the SEC, CAM terminated the public offering and instituted a buyback for its investors. In addition, Enneking acquiesced to the SEC’s censure and agreed to pay a fine of $200,000 without confirming or denying the charges.

Facing its own pressure from the regulatory agency, TokenLot and its principals, Lenny Kugel and Eli Lewitt, paid $471,000 in disgorgement with $7,929 in interest, agreeing to “retain an independent third party to destroy TokenLot’s remaining inventory of digital assets.”

“Without admitting or denying the SEC’s findings,” the agency claims, Kugel and Lewitt will each pay individual fines of $45,000 and have “agreed to industry and penny stock bars and an investment company prohibition with the right to reapply after three years.”

These penalties come after TokenLot handled funds from more than 6,100 clients and managed over 200 different cryptocurrencies in the process. Its business model operated under trading profits and taking “a percentage of the money that TokenLot raised for ICOs.” The majority of the Michigan-based company’s trading activity took place after the DAO Report was released, ceasing in February 2018.

“U.S. securities laws protect investors by subjecting broker-dealers and other gatekeepers to SEC oversight, including those offering ICOs and secondary trading in digital tokens,” Stephanie Avakian, co-director of the SEC’s Enforcement Division said in the press release regarding TokenLot. “We continue to encourage those developing digital asset trading businesses to contact the SEC staff at FinTech@sec.gov for assistance in analyzing registration and other securities law requirements.”

Earlier today, FINRA, the SEC’s self-regulatory complement in the private sector, filed a complaint against Timothy Tilton Ayre for “the unlawful distribution of an unregistered cryptocurrency security called HempCoin,” in conjunction with his publicly traded company, Rocky Mountain Ayre. Both cases are emblematic of how the largely unregulated cryptocurrency industry continues to grapple with formal regulatory organizations as its popularity increases.

This article originally appeared on Bitcoin Magazine.

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A New Precedent: FINRA Charges Crypto Broker With Securities Fraud

A New Precedent: FINRA Charges Crypto Founder With Securities Fraud

The Financial Industry Regulatory Authority (FINRA), a non-profit watchdog for public brokerage firms in the U.S., has had its first run-in with the cryptocurrency industry. The self-regulatory organization is filing a complaint against a Massachusetts man for “the unlawful distribution of an unregistered cryptocurrency security called HempCoin.”

Timothy Tilton Ayre, FINRA alleges, illegally associated sales in his publicly traded company, Rocky Mountain Ayre Inc. (RMTN), with the marijuana industry token. Allegedly purchasing the rights to HempCoin in June of 2015, Ayre rebranded the coin as an RMNT-backed security, FINRA’s complaint states.

According to FINRA, Ayre attempted to market his “worthless” company and sell shares through HempCoin by advertising the cryptocurrency as “the first minable coin backed by marketable securities.” Heralding HempCoin as “the world’s first currency to represent equity ownership” in a public company, Ayre reportedly guaranteed that each token represented 0.10 shares in RMTN.

Since Ayre never registered HempCoin with the SEC, FINRA is charging him with “unlawful distribution of an unregistered security.” Moreover, the self-regulatory body accuses Ayre of defrauding investors “by making materially false statements and omissions regarding the nature of RMTN’s business, failing to disclose his creation and unlawful distribution of HempCoin, and making multiple false and misleading statements in RMTN’s financial statements.”

FINRA explains in its statement that the filing does not constitute legal action. As “an initiation of a formal proceeding,” Ayre can respond to the filing by requesting a formal disciplinary hearing. In the event that Ayre’s defense doesn’t hold up and he’s found guilty, he could be fined, censured, suspended or barred from the securities industry; relieved of his gains; and/or forced to pay reparations to investors.

The filing is the first action taken by a self-regulatory industry against an individual involved in the cryptocurrency industry, and it’s the first time FINRA has engaged with a securities dispute directly relating to the cryptocurrency market.

That said, formal regulators have wrestled with the unregistered sale of securities before, even outright scams. Both FINRA and the SEC’s reckoning with token projects and the sometimes unscrupulous actors who promote them continues to insert itself into the debate on the distinction between utility/security tokens and the merit of cryptocurrency regulations.

This article originally appeared on Bitcoin Magazine.

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U.S. SEC Suspends Trading for Two Swedish-Based Crypto ETNs

U.S. SEC Suspends Trading for Two Swedish-Based Crypto ETNs

Two securities, one that tracks bitcoin and another that tracks the cryptocurrency ether, have been temporarily halted by a U.S. regulatory watchdog due to investor confusion.

Starting September 9, 2018, the Securities and Exchange Commission (SEC) has suspended all U.S. trading of Bitcoin Tracker One (CXBTF) and Ether Tracker One (CETHF) until September 20, 2018. The exchange-traded notes (ETNs) are issued by Swedish company XBT Provider AB, a subsidiary of U.K.-based CoinShares Holdings.

Per the order, U.S. brokers are barred from trading the ETNs “for any purpose other than to facilitate sales of instruments owned by non-broker customers…” Essentially, this means that broker-dealers can only help their clients to exit these markets to liquidate their positions, while all other trading activity is prohibited until the order expires.  

With a caution to “broker-dealers, shareholders and prospective purchasers” to “carefully consider … any information subsequently issued by [XBT Provider AB],” the SEC cited investor confusion as a primary reason for restricting investor access to the products.

The confusion is over sales and marketing materials that characterized the products as the more stringently-regulated exchange-traded funds (ETFs), when in fact, they are exchange-traded notes (ETNs), according to the order.

Both types of securities are similar in that they allow investors to participate in the market without having to purchase the physical commodity. The primary difference comes down to risk. An ETF is similar to a stock in that the issuer holds the asset it tracks, whereas an ETN is more like a bond in that it is an unsecured debt. Yet, because ETNs are structured investment products issued by a major bank, as opposed to an asset pool, they come with a lower level of risk.  

Bitcoin Tracker One started trading on the Nasdaq Stockholm Exchange in 2015, and Ether Tracker One launched in October 2017.

Bitcoin Tracker One was listed in U.S. dollars for the first time in August 2018, making it easier for brokerages to offer the securities to American investors. Previous to that, investors could only buy into the Swedish ETN product using euros or Swedish kora.

The trading suspension is the latest in the SEC’s increasingly busy engagement with the cryptocurrency industry. In July 2018, the SEC rejected a second attempted ETF filing by the Winklevosses. The following month, it denied nine bitcoin ETF filings at the staff level, but then the Commission decided to review these rejections and re-evaluate the proposals, a move that gave the industry a glint of optimism in a hitherto fruitless effort to secure the institutional-grade product for U.S. markets.

This article originally appeared on Bitcoin Magazine.

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Abra CEO Believes Bitcoin ETF Eminent, SEC Just Needs the Right Suitor

Abra CEO Believes Bitcoin ETF Eminent, SEC Just Needs the Right Suitor

Bill Barhydt, founder of bitcoin wallet app Abra, said the U.S. Securities and Exchange Commission (SEC) would approve a bitcoin exchange-traded fund (ETF) within a year once the financial regulator feels comfortable with the caliber of the applicants.

A bitcoin ETF would allow investors to purchase bitcoin through funds listed on a regulated, legacy stock exchange. Like the bitcoin futures contracts that came before it, a bitcoin ETF is seen by many as the bridge that will encourage institutional investors to cross over to the emerging crypto market.

Speaking on CNBC’s The Coin Rush, Barhydt said the SEC’s refusal to approve any bitcoin ETF application is down to the individuals filing them, who he claims “don’t fit the mold” of those the SEC is “used to approving.”

Barhydt seems to suggest that in order for an exchange or financial organization to receive approval for a bitcoin ETF, the entity has to be one that “looks, feels and smells” like something that the SEC is accustomed to.

“I used to work for Goldman Sachs, but if you look at how I’m dressed you probably wouldn’t know it. So I probably, unfortunately, couldn’t go like I am here to a meeting at the SEC to say I’m applying for the ability to issue an ETF,” he added.

He believes, however, that the SEC will approve a bitcoin ETF next year as there is just too “much demand for it” from the community.

“It’s going to happen in the next year; I would actually make a bet on it,” he noted.

Barhydt’s comments come on the heels of a statement made by Dan Morehead, CEO of Pantera Capital, who said a bitcoin ETF approval will take “quite a long time,” as cryptocurrency adoption is still in its infancy. Morehead also advised investors to focus on bullish news such as the launch of ICE’s digital platform for bitcoin futures.

Applications for ETFs have been met with resistance at every turn. The SEC has rejected two funds proposed by the Winklevoss Twins, extended its decision period on the listing of the VanEck/SolidX fund until September 30, 2018, and shot down a host of other funds filed by ProShares, GraniteShares and Direxion. This last round of rejections, however, is pending review by the SEC’s higher-ups, as the decision was made at the staffing level and has been picked up for review by the Commission itself.

This article originally appeared on Bitcoin Magazine.

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As Venezuela Takes Aim at Remittances, Bitcoiners Take Collateral Damage

As Venezuela Takes Aim at Remittances, Bitcoiners Take Collateral Damage

The Venezuelan government is cracking down on remittance payments with a new banking mandate, one that could put the country’s Bitcoin users on an even tighter leash.

In a letter “addressed to all banking institutions,” the government has ordered all domestic banks to disclose the IP addresses, financial details, transaction amounts and locations of all citizens who access their banking services from outside the country.

Per the measure, Venezuelans are expected to “notify [their] banking institution of [travel] instances prior to [departing], explicitly indicating their destination place(s)” and how long they’ll be out of country, the letter reads.

If a citizen fails to comply with the above stipulations, banks may “enact a special condition that restricts the ability of the client to make online transactions,” effectively locking them out of their bank accounts if they are caught accessing services outside of the county. The bank is then required to “report the policy holder’s name; identification of the resource/asset; date and place of provenance; date of imposed restriction and the IP address from which access was attempted” to the National Entity of Financial Intelligence.

“Lack of compliance with the above stated,” the letter concludes, “will result in the imposing of sanctions in accordance with the terms outlined by the legislative decree.”

An Attempt to Monopolize Money Transfers

The measure, self-described as a means to “preserve the interests of the users and of the general public,” is the government’s attempt to strongarm the community of Venezuelans who migrate to neighboring countries, such as Argentina, to send money home. Their own country’s economy ravaged by hyperinflation, these expats seek work abroad in hopes of earning a living wage to support themselves and their loved ones.

It’s these citizens funneling money back into the country that the government wants to police with its new order.

“A lot of people are sending money to their relatives in Venezuela and they want a cut of that,” Venezuelan Eduardo Gómez, head of support at Purse.io, told Bitcoin Magazine. This strategy, he continued to explain, is much like the Cuban government’s own monopoly over cross-border transaction clearing.

“If you look at what Cuba is doing … the biggest revenue source for Cuba is remittances; it’s all the Cubans living in Florida, in Miami, sending money home to their families. If you want to send money to Cuba, you have to go through the government to sell dollars for Cuban pesos.”

Venezuelan officials are reaching for the same control. In sanctioning state-approved trading houses, which as Gómez suggests are in the government’s back pocket, politicians are hoping to reroute all remittances through these institutions to take a cut of payments. The bank order is the means by which the government intends to coerce citizens to use these services.

And their IP addresses are the leverage. As the order indicates, if a client is caught accessing online banking services abroad, or she fails to report the required information to her bank, then that client could lose banking privileges.

Gómez told us that the government has already come down on citizens using middleman services who offer cheaper money transfer services in neighboring countries, citing his siblings’ use of such services in Uruguay.

This new measure will look to sweep up those they’ve missed, including users of well-known OTC Bitcoin exchange LocalBitcoins.

With Remittances in Sight, Bitcoin Users Caught in Crossfire

“Bitcoin is a threat to [the government] because people are using LocalBitcoins to trade money around,” Gómez said.

While Gómez admitted that there’s less volume on Latin America’s LocalBitcoins hubs compared to international exchange volumes, he did say that “volume is increasing,” as it has become a popular remittance option to circumvent government-sanctioned trading houses.

Expats will even use the service as an alternative to foreign currency transfer intermediaries. Many Venezuelans living and working in Argentina, for example, will convert their Argentinian pesos into bitcoin. Using LocalBitcoins, they’ll search for a Venezuelan trader who uses the same bank as them, something that can be tricky depending on rates, bitcoin-to-bolivar liquidity and transaction size. Once a user finds the right match, they’ll give the buyer their bank account number — or, in some situations, that of a relative — and settle the transaction.

Under the government’s new requirements, Venezuelans who deposit directly into their own bank accounts could be in trouble, Gómez said, as they could have their banking services shuttered on account of illegal use — with similar consequences for those buyers transferring the funds. If the measure takes its desired effect, Gómez believes that it could have damaging  ramifications on Bitcoin’s use and LocalBitcoins’s presence among Venezuelans.

“What this means for Bitcoin in the short term is that it could take some liquidity from LocalBitcoins because I have heard some rumors that a lot of Latin American traders for LocalBitcoins are Venezuelans living abroad. A lot of these guys left the country years ago, so what may happen is that a lot of those traders won’t be able to log into their bank accounts.”

Theoretically, this is easy to overcome. Instead of transferring funds into your own account, for instance, you could have them sent to a relative, instead. Gómez forecasts this as a likely outcome — one that, if it causes an uptick in LocalBitcoins’s popularity, could lead the government to shut down domestic access to the platform entirely.

“In the long term, the government may restrict LocalBitcoins via something like DNS blocking or IP blocking to restrict access to LocalBitcoins in Venezuela. If they see that a lot of people are using LocalBitcoins to circumvent this IP restriction, then they may see it as a threat.”

Still, this action would be a long time coming if it’s ever executed, Gómez predicts, for the same reason why LocalBitcoins is the only cryptocurrency exchange still active in the country: officials use it.

“A lot of people inside the government use LocalBitcoins to sell their bitcoins that they earn via mining because all of the government officials mine,” he said.

Even as the Venezuelan police raid local mining operations, government officials themselves mine with immunity, having bootstrapped their own rigs since the market’s 2017 bull run. Seeing as it’s so popular among officials, Gómez thinks the government will leave the exchange alone — for now, at least.

Bigger Than Bitcoin

In our talk, Gómez indicated that the government’s banking order will no doubt create headaches for Venezuelan Bitcoin users. But by and large, the order is about effecting greater control over all aspects of the economy. Wrangling in Bitcoin users, specifically those sending money across borders, is just one degree of this control.

“Ultimately, the government wants a cut of the pie for remittances,” Gómez said.

LocalBitcoins is certainly cutting into the government’s transaction processing profit, but it’s not only used for money transfers. Gómez also told Bitcoin Magazine that Venezuelans use the service to check the bolivar’s rate against the U.S. dollar, which has become a de facto trading standard for many in-country services.

Venezuelans used to reference DolarToday, a popular service for transparent bolivar-dollar rates. But ever since rumors began to spread that the Venezuelan government covertly purchased the domain to control the rates, “LocalBitcoins is becoming the market reference for the dollar,” Gómez said. Users will refer to the bitcoin-bolivar rate against the bitcoin-dollar rate to arrive at a reliable bolivar-dollar rate.

The government’s economic war, as Gómez indicated, is total — one that looks to tighten the noose around any service or tender that works around officially sanctioned services. Given LocalBitcoins is proving to be a multifaceted tool for those Venezuelans who use it, it’s reasonable to assume that, if its popularity continues to surge, the government may take action.

If it does, this could completely throttle the last access points Venezuelans have to cryptocurrency platforms and services. Gómez said that even though LocalBitcoins is the only operable exchange left in the country, “there’s [still] a lack of liquidity.”

In the event of this closing, Venezuelans will have yet another hurdle to jump when attempting to use crypto; this would neutralize one of the only economic safe havens citizens have left as the bolivar continues to hemorrhage value.

“Venezuelan salaries are so low that there’s not even a way for people to buy crypto. To put things into perspective, the average salary in Venezuela for one month of work is $1. Can you imagine that? Working a full month and only earning $1 at the end of it,” Gómez concluded in our talk.

This article originally appeared on Bitcoin Magazine.

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Canada Delays Regulation of Cryptocurrencies and Blockchain Companies

canada delays

The Canadian government has postponed the release of its final regulations for cryptocurrency and blockchain companies. The final published regulations were due this fall, but the government now says they won’t be published in the Canada Gazette until late 2019.

Because the federal government is already in pre-election mode ahead of the 2019 election, the final cryptocurrency or “virtual currency” regulations have effectively been put on hold, leaving the current regulatory regime in place until well into 2020, as there is an additional 12-month period after publication for any new regulations to take effect.

Some companies in the space see this as a positive for the industry’s competitiveness as the government is effectively backing away from the stricter rules proposed in the draft version published in June 2018.

Others are concerned that this delay will harm their competitive position in the quickly growing international crypto market, where countries like Switzerland and Malta are actively encouraging crypto businesses with few regulations and a favorable tax regime.

The Blockchain Association of Canada (BAC) told Bitcoin Magazine that it appreciates that the government is proceeding with caution, in recognition of the complexities of this new, evolving sector.

“The decision to delay the proposed regulations bodes well for the Canadian blockchain and cryptocurrency space. The government is committed to an innovation agenda and sometimes … it may be best to observe and intervene as little as possible,” said BAC Executive Director Kyle Kemper.

Large Volume of Submissions From the Crypto Sector

According to a number of participants, the sheer volume and quality of the comments and responses by the industry to the proposed regulatory package likely contributed to the government’s decision to hold off on publishing until next year.

Cryptocurrencies and blockchain companies and organizations, like the Money Services Business Association, were invited to submit comments and attend meetings with Finance Canada officials.

BRI Calls for a Central Regulatory Body Comparable to the SEC

One set of comments submitted to the federal finance department included a report from the influential Toronto-based Blockchain Research Institute (BRI).

The BRI assembled a round table of 70 participants from the industry and submitted a report with carefully thought out, detailed recommendations.

The report says there’s substantive regulatory work that needs to be done to create certainty and build a competitive industry, although the participants called for a middle ground, saying:

“… as the blockchain revolution unfolds, regulators would be wise to avoid the chainsaw when microsurgery could do. To be sure, we do not want the Wild West.”

The BRI report points out that Canada is the only developed federal democracy that does not have a securities regulatory authority at the federal government level and recommends creating a central regulatory body at the federal level like the U.S. Securities and Exchange Commission (SEC).

Instead, “ten provinces, three territories, and the federal government all juggle responsibility for ensuring capital market functions efficiently and honestly — attempting to keep a watchful eye on issuers, investors, investment dealers and other market players.”

“This model was set up to oversee a much simpler world where there were actual traders on stock exchange floors, and where the pace of innovation in capital markets was glacial and regionally confined,” adds the report.

Continuing Uncertainty in the Crypto Sector

Coinsquare Exchange CEO Cole Diamond, as a member of the BRI’s Advisory Committee, made the case for more regulatory clarity. He told Bitcoin Magazine:

“I don’t think that delaying regulatory clarity is a good thing. At the same time, I understand how complex this market is. The regulators are still learning, and I can assure everyone that they are trying.”

“My hat goes off to the OSC Launchpad, the Ministry of Finance and others for their focus on the market. We look forward to continuing to work with them to bring about opportunities for Canadian businesses to lead globally in this exciting space.”

Evan Thomas, a Toronto-based lawyer working with crypto startups on regulations and compliance, also thinks that there needs to be some serious work done on regulating cryptocurrencies and blockchain companies.

Thomas told Bitcoin Magazine:

“Delay can put Canadian businesses at a competitive disadvantage. Other jurisdictions are moving more quickly to establish regulatory frameworks around crypto, to the extent those frameworks don’t already exist.

“Until the regulations are final, it will be challenging for Canadian crypto businesses to establish critical banking and other relationships because many financial sector players are waiting for a regulatory framework to be in place. The longer the delay, the harder it may be for the industry to grow in the meantime.”

Amber D. Scott, founder of compliance consultancy Outlier Solutions Inc., is pleased that the government “is taking feedback from stakeholder groups seriously.”

Scott told Bitcoin Magazine that “for the time being, things stay as they are. We advise companies to start thinking about the resources that they will need to deploy when the final version is published but to wait for that version to deploy development because things are likely to change at some point.”

In Thomas’s view, this delay will hurt companies in the space, some of whom will go ahead anyway to regulate themselves. He noted that “Canadian crypto businesses are implementing compliance programs even when not legally required because financial partners require them or for general risk management. The longer the delay, the more costly it may be to re-work those programs to meet the final regulations.”

This article originally appeared on Bitcoin Magazine.

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China Blocks Access to Over 120 Offshore Digital Currency Exchanges

China crackdown

China is continuing its crackdown on bitcoin and cryptocurrency-related ventures. The country is now blocking access to more than 120 offshore cryptocurrency exchanges utilized for trading purposes by mainland customers.

In addition, officials are also looking to shut down websites pertaining to both cryptocurrencies and initial coin offerings (ICOs), and to prevent businesses from accepting payments in digital assets.

ICOs were initially banned last September and were described as “unauthorized” and “illegal” fundraising activities. That same month, Chinese regulators ordered all cryptocurrency exchanges within the country to cease trading practices. This caused many ICO and cryptocurrency ventures to pack up their bags and move to the neighboring region of Singapore, which boasts more crypto-friendly regulation.

Over the past year, nearly 90 different cryptocurrency exchanges and about 85 ICOs have been shut down in China. The yuan-bitcoin trading pair has also dropped from 90 percent to less than 5 percent of the world’s total bitcoin trades.

Pan Gongsheng — who heads the Leading Group of Internet Financial Risks Remediation — has been adamant that the cryptocurrency ban in China is the “right decision.”

“If things were still the way they were at the beginning of the year, over 80 percent of the world’s bitcoin trading and ICO financing would take place in China,” he states. “What would things look like today? It’s really quite scary.”

China isn’t stopping with crypto businesses. Officials are also blocking cryptocurrency-related news accounts on social media. The country’s primary social platform WeChat — which currently boasts over one billion users — has allegedly blocked several blockchain and crypto accounts due to suspicions that they were pushing ICO activities. Some of the companies affected by WeChat’s actions include Huobi News, Deepchain and CoinDaily.

A leading group of both social and financial risk prevention and control in the country’s capital of Beijing is also banning digital currency promotion. Recently, the organization issued a notice asking all public retail outlets, such as shopping malls, hotels, office buildings and guest houses, to cease hosting any kind of publicity or promotional activity relating to ICOs and cryptocurrencies.

The news comes after President Xi Jinping induced a sense of optimism amongst Chinese crypto traders when he called blockchain technology a “new industrial revolution” that could benefit both governments and their people.

Meanwhile, the neighboring country of South Korea — which like China, instilled a ban on ICOs and threatened to do the same with cryptocurrency exchanges — has since vied to build a regulated atmosphere for cryptocurrency ventures and platform operators. Officials have also said that they are reconsidering their stance on ICO projects.

This article originally appeared on Bitcoin Magazine.

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U.S. SEC Denies Nine More Bitcoin ETFs

SEC ETF

The United States Securities and Exchange Commission (SEC) just put nine more bitcoin exchange traded funds (ETFs) on the chopping block.

In three separate orders issued on August 22, 2018, the agency nixed the proposals and contingent rule changes for ETF filings submitted by ProShares, GraniteShares and Direxion. Of these three, five proposals came from Direxion, while GraniteShares and ProShares filed two each.

Unlike past ETF filings, these funds intended to base their data on the bitcoin futures market, not the spot market. Given that the CBOE and CME offer these futures in a regulated trading environment, this structure would seemingly address the SEC’s biggest reservation for approving a bitcoin ETF; namely, that the underlying market is unregulated.

Still, these recent rejections take from the same script as those past. The bitcoin market, the SEC claims, is too loosely structured and lacks protections against fraud and manipulation to merit an exchange traded fund or product.

“… the Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices,” each order reads.

Further rationalizing its decision, the SEC claims that none of the filings offered “evidence to demonstrate that bitcoin futures markets are ‘markets of significant size.’” Market size, the SEC argues, is imperative for establishing “surveillance-sharing with a regulated market… to satisfy the statutory requirement that the Exchange’s rules be designed to prevent fraudulent and manipulative acts and practices,” an argument they’ve issued in previous bitcoin ETF rejection orders.

Same News, Different Day

The slew of rejections is unsurprising given the SEC’s track record with similar proposals.

Bitcoin ETF rejections are becoming par for the course, as just last month, the SEC shuttered hopes for the Winklevosses’ second attempt at an ETF, the first attempt coming in March 2017.

Unlike the Winklevoss ETF, which would have based its prices on the bitcoin spot market writ large, these funds were proposing to base their prices on the bitcoin futures markets as provided by the CBOE and CME stock exchanges. As before, though, the SEC still finds that these markets aren’t mature enough to justify an exchange traded product.

The SEC reinforced this belief by quoting a letter it received from the CBOE Futures Exchange President and COO.

“… ‘the current bitcoin futures trading volumes on Cboe Futures Exchange and CME may not currently be sufficient to support ETPs seeking 100% long or short exposure to bitcoin,’” the excerpt reads.

“These statements reinforce the Commission’s conclusion that there is insufficient evidence to determine that the CME and CFE bitcoin futures markets are markets of significant size,” the SEC continued.

With its decision, the SEC reinforced that its “disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment,” an argument it has made before.

Hester Peirce, an SEC commissioner appointed this January, however, believes that the SEC’s past decision tacitly makes this judgement call on behalf of American investors. In a recent interview with Bitcoin Magazine, she said that the Winklevoss ETF rejection was “not a great precedent,” arguing that it puts the SEC into a gatekeeper role for what is and isn’t a legitimate asset.

“It plays into a bit of a thread in securities regulations — at the federal and at the state level — which is that there’s an inclination among regulators to almost step into the shoes of the investor and say whether or not the investor should be making that particular decision, based on our assessment of the actual product — in this case, the actual asset. So yes, that is a disturbing precedent, because I can’t make assessments about those things.”

By the end of September, the SEC will issue orders on another round of ETFs after delaying its decision earlier this month.

This article originally appeared on Bitcoin Magazine.

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Op Ed: New Bermuda Legislation Will Create a Novel Class of Bank to Service Fintech Companies

New Bermuda Legislation Will Create a Novel Class of Bank to Service Fintech Companies

As we reported on July 19, 2018, Bermuda is determined to establish itself as the leading jurisdiction for fintech entrepreneurs, in particular those involved in initial coin offerings (ICOs), digital assets and virtual currencies. Having recently passed the ICO Act and the Digital Asset Business Act (DABA), Bermuda’s Premier and Minister of Finance, the Hon. E. David Burt, JP, MP, and his cabinet are now focused on creating a new class of bank to facilitate Bermuda’s fintech initiative.

The Bermuda Monetary Authority (BMA) has spearheaded a new bill, titled the Banks and Deposit Companies Amendment Act 2018 (Restricted Banks Act), that will establish a novel, restricted banking license to encourage banks to provide their services to fintech companies.

This legislation is vital, as to date Bermudian banks have been unwilling to provide banking services to the Island’s nascent fintech startups. The government of Bermuda and the BMA strongly believe that the Restricted Banks Act will resolve this impediment and propel Bermuda’s fintech initiative forward.

The Restricted Banks Act

On July 27, 2018, the House of Assembly passed the Restricted Banks Act and the bill now moves to the Senate for ratification. The government of Bermuda and the BMA designed the Restricted Banks Act to allow international participants to satisfy a critical need for the Island’s fintech companies. Of particular importance are Clauses Two and Three in the Restricted Banks Act.

Clause Two provides that the BMA has broad discretion in regards to the new, restricted banking license. The BMA may impose conditions on or restrict the services that may be provided under the license and may vary or revoke any such condition or restriction. Clause Two also provides that the Minister of Finance, acting on the advice of the BMA, may amend by order the Third Schedule, which specifies the persons to whom banking services may be provided.

Clause Three, which sets forth the Third Schedule, provides that the BMA may authorize banks licensed under the Banks and Deposit Companies Act 1999 to provide banking services to six defined categories of persons. Essentially, the BMA has broad authority to license banks to provide banking services to fintech companies that are licensed under the ICO Act or DABA or that have obtained consent from the Minister of Finance to launch ICOs, as well as to their affiliated companies and to certain of their agents and service providers.

Resolving the Current Impediment to Bermuda’s Fintech Initiative

The Bermuda Bankers’ Association has explained the domestic banks’ reluctance to enter the ICO, digital assets and virtual currency markets, citing their “ongoing need to manage their risks to continue to operate in accordance with their existing correspondent banking relationships.”

Notwithstanding these valid concerns and the Bermudian banks’ general aversion to risk in the wake of the global financial crisis, the Hon. E. David Burt is determined to propel Bermuda’s fintech initiative forward, having declared that Bermuda must evolve and innovate. According to the Premier and Minister of Finance, the reticence of the Bermudian banks cannot be allowed to frustrate Bermuda’s continued economic growth and success.

The Hon. E. David Burt and his Progressive Labour Party believe that the implementation of the Restricted Banks Act will resolve the current impasse, declaring that the bill will “ensure that the government [of Bermuda] is able to effectively execute on its fintech initiatives, as well as encourage responsible fintech innovation that provides fair access to banking services and fair treatment of consumers.”

Importantly, there appears to be key bipartisan support for the Restricted Banks Act. James Jardine, the independent Vice President of the Senate, has stated that, although the fintech industry poses its own idiosyncratic risks, he receives “some degree of comfort” from the BMA’s involvement in the drafting of the Restricted Banks Act.

Ultimately, if Bermuda’s fintech initiative is to be successful, fintech companies will require access to banking services on the Island like any other company authorized to conduct business by the BMA. The Restricted Banks Act should create a banking environment in which such access is possible.

With Increased International Competition for Fintech Business on the Horizon, the Time to Act Is Now

Bermudian fintech companies require access to requisite banking services as soon as possible, as, at this very moment, various other jurisdictions are working to surmount the same hurdle with their respective banking regulators

As is often the case with new technologies and new lines of business, first movers will be well-positioned to attract a lion’s share of the burgeoning fintech market. For example, Bank Frick in Liechtenstein, Fidor Bank in Germany and Bank Vontobel AG in Switzerland have been some of the first banks to service digital asset and virtual currency startups in Europe.

Unsurprisingly, these three banks have begun to siphon fintech business from neighboring European countries, who have been unable or unwilling to provide banking services to fintech companies.

Appreciating the urgency in Bermuda, the Hon. E. David Burt has avowed, “Bermuda must be nimble or we will be left behind.”

Based on this view, the government of Bermuda and the BMA appear to be propelling the Island forward with a prudent and practical new class of banking license that is designed to support the development of the country’s fintech initiative.

This is a guest post by Huhnsik Chung, a partner at Stroock & Stroock & Lavan LLP in New York, and Nicholas Secara, a senior associate in the firm’s New York office. It is provided for informational purposes and should not be construed as legal advice. Views expressed are their own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc. 

This article originally appeared on Bitcoin Magazine.

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Top Crypto Exchanges Join Winklevosses’ Self-Regulatory Organization

Top Exchanges Join Winklevosses’ Self-Regulatory Organization

Some of the crypto industry’s biggest exchanges are joining with the Winklevosses in an effort to bring self-regulation to a market that many perceive to be fly-by-night and unstructured.

Five months following its creation, the Virtual Commodity Association (VCA) has onboarded Bittrex, bitFlyer USA and Bitstamp, a site update reveals. A press release detailing the developments indicates that the VCA plans to hold its inaugural meeting in September 2018. On the docket for deliberation, the association plans to discuss membership guidelines, best practices for productive self-regulation and staffing appointments for the VCA’s executive director and board of directors.

“The initial participants in the VCA Working Group will include: Bitstamp, Inc., bitFlyer USA, Inc., Bittrex, Inc., and Gemini Trust Company, LLC. The Working Group will work toward the goal of establishing an industry-sponsored, self-regulatory organization (SRO) to oversee virtual commodity marketplaces,” the official press release states.

The first round of members to join since the Winklevosses’ created the self-regulatory organization with their Gemini exchange, the expansion represents a significant step toward private sector self-policing in an industry that has seen little regulatory direction from public sector institutions, particularly in the United States.

Last month, on July 26, 2018, the SEC denied an ETF proposed by the Winklevosses in cooperation with BATS Global Market’s BZX stock exchange. Just a day before, the SEC put five ETF decisions on the backburner until September, going on weeks later to delay yet another ETF until the same month, as well.

With its rejection of the Winklevoss ETF, the SEC suggested that bitcoin markets do not feature enough structure or regulatory safeguards to merit approving an ETF, a decision that one commissioner believes sets a disconcerting precedent for playing gatekeeper and signaling to investors which markets it deems as legitimate.

Creating a body to deal with the issue of industry self-regulation should play well with regulators; furthermore, it should also signal to institutional investors that the crypto market is starting to mature and is ready to enter its next phase of growth.

Maria Filipakis was also announced as the VCA interim executive director. Formerly executive deputy superintendent at the New York Department of Financial Services (DFS), Filipakis was key to the drafting and implementation of the New York BitLicense regulations. The body will also have an independent board and a mandate to establish a framework for crypto industry best practices.

John Roth, chief compliance and ethics officer at Bittrex, commented that the new body will improve the credibility of the industry in the eyes of regulators.

“The blockchain industry must focus on protecting its customers and operating in a responsible manner to significantly increase adoption globally. By working with the VCA, we can advance our shared goals of improving transparency, accountability, and security across all virtual currency trading platforms.”

Image courtesy of cellanr CC BY-SA 2.0, via Wikimedia Commons

With additional contributions from Colin Harper.

This article originally appeared on Bitcoin Magazine.

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Op Ed: Exploring the SEC’s New “Sufficiently Decentralized” Test

Op Ed: Exploring the SEC’s New “Sufficiently Decentralized” Test

The regulators have awoken. SEC Director William Hinman introduced novel concepts to the securities law analysis such that sellers of digital assets may have an escape valve. Yes, even if their initial sale triggered securities laws, later sales may not. The industry should not move forward without careful exploration of these concepts.

First order of business: Can digital assets change their colors? As outlined by Global Digital Finance, a digital asset can be a financial asset token (potentially coded as a security), a payment token (Hinman used the term “coin”), or a consumer token (Hinman used the term “token”). The relevant question is not whether an asset can change its token type, but whether the latter two types — a “coin” or “token” in Hinman’s words — can ever become securities.

Whisky as a Security?

Director Hinman’s discussion of Scotch proves instructive.

The SEC director carefully teased out a distinction between a consumer item and its manner of sale. The ultimate takeaway: Whisky is never a security, but its sale can trigger securities laws. It would be ridiculous to say whisky morphs into a security because of how it is sold; it always remains a non-security consumer item.

Replace “whisky” with “coin” or “token” and the logic remains sound. It makes no sense, then, to say a consumer or payment token can morph into a security. That is, unless the code itself changes such that the code itself represents stock or another type of security instrument.

This is more than semantics; precision matters. Following the above logic, developers need not fret about doing their job. So long as a developer creates a consumer or payment token, the developer does not create a security or anything that can morph into one. Activity outside of coding will be what makes securities laws applicable. This distinction should give comfort to the builders out there. Code without worry.

Activity outside of coding will be what makes securities laws applicable.

Anyone who wants to sell, however, should worry. The sale may inadvertently trigger securities laws. Purchasers in any sale will form expectations. The sales process must manage these expectations so that buyers do not think they will profit from the managerial efforts of others.

Hinman’s Guidance

Director Hinman’s remarks provide some principles to follow for anyone attempting a “coin” or “token” sale that rests outside of the securities regime. Keep these in mind when planning your sale.

Find your users.

In Howey, promoters sold orange groves “to hotel guests, not farmers.” If farmers bought the orange groves and worked the land, the Howey test would not exist. Find your farmers. Find the users who will use your network. This will help preserve the argument that you sold “to participants who need the functionality the network and the digital assets offer.”

Build something real, something useful.

The Howey analysis weakens when purchasers consume what they buy. A network with real use looks less like it involves an investment contract. The following facts indicate your buyers intend to consume tokens on your network: marketing targets actual users, buyers represent they will use tokens, buyers have purchase limits, and buyers have no financial incentive to hodl.

Cultivate a distributed village.

Director Hinman said a “sufficiently decentralized” network may not need the benefits of a disclosure regime. Combine prior research with Hinman’s suggestion that Bitcoin and Ethereum have sufficiently decentralized networks and practical guidance emerges:

  • Any network with node participation and geographic distribution at least as distributed as the Bitcoin network should be considered sufficiently decentralized.
  • Reward volatility may vary for small miners without making the network insufficiently decentralized.
  • The presence of centralized mining power (even up to 61 percent of weekly mining power split between three miners) does not make a network insufficiently decentralized.
  • The presence of powerful core developers or an influential foundation does not make a network insufficiently decentralized.
  • An open-source, proof-of-work network may be sufficiently decentralized at inception.

All this counsels toward creating a global, well-distributed network. How to further measure decentralization, especially at genesis or for proof-of-stake or delegated proof-of-stake networks, remains an open question ripe for a no-action letter request.

Share your secret sauce.

Hinman argued that decentralization correlated with a reduction in information asymmetry between promoter and purchaser. Yet decentralization and information asymmetry may coexist where only a small set of developers actually understand changes made to a decentralized network. Disclosure helps, but does not resolve, the asymmetry. Only consumer education can.

As a matter of policy, however, it would be difficult for a regulator to argue that purchasers need the protection of a disclosure regime where developers have disclosed everything. Layering a disclosure regime onto a completely transparent project would, in Hinman’s words, “add little value.”

Disclosure helps, but does not resolve, the asymmetry. Only consumer education can.

The suggestions above align surprisingly well with core philosophical tenets held by proponents of decentralization. But without clarity on “sufficient decentralization,” all token sales risk violating securities laws. Fortunately, the SEC has expressed willingness to work with industry participants. Companies should take advantage of this rare offer to shape how securities laws will apply for the foreseeable future.

This is a guest post by Josh Garcia, Principal at Ketsal Consulting, the stratecig consulting arm of blockchain-focused law firm Blakemore Fallon. Opinions expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.

This article originally appeared on Bitcoin Magazine.

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The SEC Is Delaying Another Bitcoin ETF Decision

The SEC Is Delaying Another Bitcoin ETF Decision

The United States Securities and Exchange Commission (SEC) is in no hurry to review the pile of Bitcoin ETF filings it has been accumulating over the past year.

Not three weeks since postponing its decision on five other Bitcoin ETFs, the SEC has indicated in a public statement that it will be delaying its decision to approve or reject SolidX Bitcoin Shares until late September.

“Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act, designates September 30, 2018, as the date by which the Commission shall either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change (File No. SR-CboeBZX-2018-040),” the statement reads.

Submitted back in June, the proposed rule change to permit the ETF comes from the Chicago Board Options Exchange (Cboe), which was cleared to list Bitcoin futures in December of last year. If approved, the ETF would be listed on Cboe’s BZX exchange in cooperation with legacy investment management company VanEck and crypto startup SolidX. This is VanEck’s second attempt to list a Bitcoin ETF after their first attempt was nixed by the SEC last year.

This is also the BZX exchange’s second attempt to secure a Bitcoin ETF listing. On July 26, 2018, a day after the SEC prolonged its deliberation for Direxion Asset Management’s five filings, the SEC rejected BZX’s joint filing with the Winklevoss twins. The ETF was rejected on the grounds that BZX has “not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices.”

With each successive rejection or prolonged decision, the industry continues to fight an uphill battle against regulators to secure its first exchange traded fund. Many believe such a listing would open the floodgates for institutional money.

SEC Commissioner Hester Peirce believes that it could also invite more mature regulation, both from the private and public sectors. On the latest rejection by the SEC, she expressed to Bitcoin Magazine that the decision is “not a great precedent,” believing that the SEC’s decision misconstrues the commission’s purpose to protect investors as a method to decide what is and isn’t a legitimate investment.

This article originally appeared on Bitcoin Magazine.

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Coinbase Renews Money Transmitter License in Wyoming, Reopens Services in State

Coinbase Wyoming

Coinbase has announced that it has renewed its money transmitter license in Wyoming three years after terminating its activities in the state. The move marks a significant shift in the working relationship between the crypto exchange giant and state regulators following the expiry of the previous license in June 2015.

Working With Regulators

In a Medium post, Coinbase said that its Wyoming customers can now access the full range of its products, including Coinbase Consumer, Coinbase Market, Coinbase Prime and Coinbase Custody. The blog post described the move as one that will “spur innovation and economic activity for individuals, families and communities across the state.”

Coinbase went on in the statement to highlight its newfound cooperation with Washington state regulators.

“Coinbase welcomed the opportunity to work with Wyoming House of Representatives Majority Floor Leader David Miller, State Senator Eli Bebout, members of the Blockchain Task Force and their colleagues to find a solution that allows cryptocurrency custodians and exchanges to reestablish operations. We are also grateful for the assistance of Commissioner Forkner, Deputy Commissioner Mulberry, along with the examiners and staff from the Wyoming Division of Banking in their prompt approval of our money transmitter application,” the post reads.

Going further, Coinbase hailed its return to Wyoming as proof that regulators, lawmakers and cryptocurrency companies can work together to encourage innovation by finding ways to accommodate cryptocurrency trade under existing money transmission laws, even exempting them when necessary.

The post specifically mentions the removal of the requirement to double-reserve cryptocurrency assets of Wyoming residents as a critical point of the agreement reached with regulators, enabling it to return to the state.

Concluding with what some will see as a statement of intent from a platform that has recently been engaged in an aggressive growth phase, Coinbase states:

“…We seek excellence in compliance and advocate for common-sense policies that allow for innovation. We will continue collaborating with legislators and regulators across the U.S. and worldwide as we work to create an open financial system for the world.”

This article originally appeared on Bitcoin Magazine.

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“Not a Great Precedent”: Commissioner Discusses the SEC’s Latest ETF Decision

“Not a Great Precedent”: Hester Peirce Discusses the SEC’s Latest ETF Decision

When the SEC announced its rejection of the Winklevosses’ latest bitcoin ETF filing, the industry found itself reckoning with a problem on repeat: striving toward the goal of approval, another Exchange Traded Fund (ETF) proposal faced the SEC’s death knell.

At this point in the industry’s development, securing an ETF has become the space’s institutional albatross, the elusivity of which hangs over each successive rejection. The most recent filing was the Winklevosses’ second attempt to list a bitcoin-backed ETF, the first being shot down last year.

Earlier this year, some dozen ETF filings, like those by Van Eck Associates Corp., never even made it to the discussion table after the SEC withdrew the applications from consideration in January. Decisions for another five filings have been delayed until September. Lacking these approvals, the industry’s only institutional market offerings come in the form of the CBOE’s and CME’s futures contracts.

The market’s slow march toward establishing a bitcoin Exchange Traded Fund or Exchange Traded Product (ETP) has become a reminder that the space is still in the midst of growing pangs, and it’s an even more salient reminder that the wheels of regulation spin slowly — and not always in every industry’s favor.

SEC Commissioner Hester Peirce thinks these wheels should be turning a bit more quickly. Recently sworn into the commission after an appointment by President Trump, Peirce did not partake in the SEC’s 3-1 vote to strike down the latest proposal, but that hasn’t kept her from expressing her disagreement with the commission’s decision. She took to Twitter on the same day as the announcement, linking to her dissenting public statement.

In the following interview with Commissioner Peirce, Bitcoin Magazine delves further into her dissent, uncovering what the decision means for the future of regulation and what it will take for the SEC to give bitcoin ETFs/ETPs a nod of approval.

Bitcoin Magazine: What were the key factors that made you dissent to the SEC’s ruling and vote “yes” on the ETP?

Hestor Peirce: So, I didn’t vote yes originally because I wasn’t here — I got here six or seven months ago, and a lot of it happened at the staff level and they can get kicked up to the commission, which is what happened here. What made me vote against what the commission did? There were three things playing into that.

One, I disagree with how they read our statutory mandate. The way I read our mandate, we should have approved this one because we really shouldn’t have been looking to the underlying markets the way that we did in the order that they put out last week.

Second issue, I do think that institutionalization in this space would address some of the concerns they lay out in their order.

And the third thing, I think that, historically, the SEC has not been great on innovation, on welcoming innovation, and for me, this order perpetuated my concerns in this regard. We need to have a willingness to welcome new approaches and I’m worried that if we keep sending the message that we’re not open to hearing from people who have new ways of doing things, then people will say we’re going to take our business to another country.

BM: In your dissent, you talk about the SEC playing gatekeeper to the bitcoin market. Is this decision setting a disconcerting precedent, giving the SEC the power to deem what should and shouldn’t be considered an asset, or have we seen this kind of behavior before?

HP: I actually think that it’s not only happened in this context, but that it’s happened with prior orders as well; however, in those cases, they were approved. But even in the past, we’ve looked to underlying commodities markets, and I think that walks us down a road that we don’t want to go down and we can’t go down.

You know, in this particular case, there’s a lot being said about bitcoin. It is a new type of asset, and I think that that played into the decision that was ultimately made. I’m worried that, by looking through to underlying markets, we’ve opened a can of worms that we don’t want to open up, where we’d have to assess underlying markets for all of these different types of assets.

I do think it’s not a great precedent. It plays into a bit of a thread in securities regulations — at the federal and at the state level — which is that there’s an inclination among regulators to almost step into the shoes of the investor and say whether or not the investor should be making that particular decision, based on our assessment of the actual product — in this case, the actual asset. So yes, that is a disturbing precedent, because I can’t make assessments about those things.

There are lots of people spending lots of time thinking about this new asset class and they should be able to make decisions about it. I can‘t stand in their shoes and say, “I can see the future better than you can see the future, I can assess where this is going better than you can assess where this is going.”

So yes, I’m very worried about the SEC putting itself in the shoes of investors, which is what it was doing here. Because frankly if this product comes to market, investors might decide, “We’re just not interested in it.”

There are lots of things that investors are going to look at when they look at an ETP — there are other products out there and they are different. There are different characteristics, so let’s put it out there. As long as the disclosure is good and as long as the exchange can manage the trading of the product, let’s put it out there and let’s let investors vote up or down based on whether or not they buy it.

BM: To what extent does the SEC decision show a lack of trust in such self-regulatory bodies, at least for this industry?

HP: Well, I mean, I think it does show a bit of a lack of trust for our existing SROs, meaning the exchanges. In my case, I’d say, look, the exchange has thought about the product it wants to list, so if it’s gone through that thought process and addressed our concerns about how the product will trade, then it’s done its job, so we can let it go forward.

In terms of the bitcoin market generally, my concern with the order’s approach is that it says, “Look, these markets aren’t regulated.” To some extent that’s true, but there are some of them that are regulated by governments; the Gemini exchange is regulated at the state level.

But the point that often gets lost in these discussions about regulations is that there’s actually a lot of self-regulation, not in the formal SRO context, but I’ve listened to a lot of discussions between factions in the crypto world and they’re criticizing each other, sometimes very openly and very harshly, and they’re calling each other out for things.

That kind of healthy, transparent, private regulation is relevant to the discussion because, to the extent that someone is going to engage in manipulation in a market, other players in that market — whether its gold or cryptocurrency — other players in that market will care about that because it will affect them. So there is some sort of a natural push to have regulation that grows organically within a marketplace.

I think the order did not give enough attention to the fact that, especially when you bring institutions into a market like this, there’s going to be a pressure to privately monitor each other. It’s not self-regulation so much as you’re watching what your competitors are doing.

BM: Not so much self-regulation as self-preservation, in some ways.

HP: In some ways, right.

BM: It’s a bit of a catch-22, isn’t it? The SEC is essentially saying, “The market isn’t regulated enough, so we can’t start regulating it.”

HP: Yes. You know, to one degree, there is a bit of logic to that. I had that same reaction as you had. The counterpoint I would offer is that we’ve got futures markets, so those markets are still relatively new, so as those markets develop, you’ll see more institutionalization and more regulation.

So there are different avenues through which you can arrive at regulation, but that’s part of what I was trying to get at with the institutionalization qualm of my dissent: If you really want this market to be more orderly, then you’ve got to let some of these forces in that are going to bring order to it.

[Here’s] another interesting point: I think some of the people in the Bitcoin community would not welcome an ETP because that’s precisely the point of why they wanted this decentralized financial system, [one] that did not involve traditional players in the financial market.

BM: The SEC has, understandably, been leading efforts to regulate the crypto industry. Are there other federal departments and agencies that you believe could be picking up some slack to give the industry some clarity regarding legislation?

HP: The problem is that we each have our own regulatory jurisdiction, and so for something like an ETP, we’re the only game in town. You know, that’s not totally true because you could go to a different country as some folks have done. But if you’re talking about in the U.S., outside of the ETPs, people are thinking about ICOs. [ICOs are] something we have to address, whether or not something’s a security.

So I think we really do have a role to play, but on the positive side — you know, I’ve been fairly negative about where the SEC has been on some of this stuff — but on the positive side, we do have Valerie Szczepanik who is focusing on cryptocurrency issues in the division of corporation finance. She is someone who is quite knowledgeable. From people I’ve talked to outside of the agency who work in the crypto space, they’re quite comfortable with her as the top staff regulator in this space because she is quite knowledgeable. I do think that there is a positive trend going on here, as well.

That said, I think your point is a good one, as there are other regulators that are looking at this space more generally. There’s the CFTC, there’s the Consumer Financial Protection Bureau’s sandbox. There are different ways, and I think part of what we’re going to have to do is work with our fellow regulators because part of the problem is that it’s not clear which regulatory box things fit in. I think there needs to be more cross agency work so that we can encourage each other through that process.

Look, some of these technologies are here to stay and we’re going to have to figure out how to build a regulatory framework or build on our existing regulatory framework to make sure that these products and the people designing them and the people who are thinking about possible use cases can come and get guidance on how they can operate within legal parameters.

BM: In your dissent, you write that “the order analyzes the ETPs through a legal and regulatory framework derived from prior approval orders for commodities with very different characteristics.” In your opinion, does bitcoin and the wider crypto market that it’s spawned deserve their own regulatory guidelines? Do we need to write a new playbook for a new market?

HP: Is it an asset class that we need to design a new regulatory framework for? Maybe, but maybe that’s not the best approach. To the extent that something is being offered and is actually a security then we should probably regulate it as such.

The questions that people have now are “How long is it a security?” and “How do we trade these in a way that is in line with securities laws?” I tend to think — and I’m open to being convinced otherwise — but I tend to think that the right approach is to work with our existing securities law framework. To the extent that something is a commodity, work with our commodities law framework and to see whether there are areas where we need to provide guidance or update our rules to accommodate any difference.

BM: It’s something that a lot of us in the space juggle around with because we get frustrated when we see what appear to be antiquated guidelines imposing rules on something that is completely new. And there are certain areas where it is a little more cut and dried with securities.

HP: To that point, to the extent that there are specific guidelines that you all are running up against that are proving problematic to engaging in legitimate activity, I’d like to hear about those. Because it’s often talked about in these broad strokes.

I’d like to know: What are the particular issues you’re running up against that are giving concern to you? That’s really helpful because we can think about areas where we may need to update our rules or issue guidance to make it work.

BM: In the dissent, you write “when we do finally approve an ETP on bitcoin…” You didn’t say if. Do you believe this is inevitable?

HP: [Laughing] I’m a bit optimistic.

BM: Perhaps not inevitable but probable?

HP: Well, the reason that I anticipate that it’s probable is because there’s a lot of investor demand. And I think at some point that that will help push the agency. When that point will come, I can’t speculate on.

BM: Do you think that surveillance-sharing agreements are going to be a large part of this?

HP: Well, the order did focus on surveillance-sharing agreements as something that it was looking at, though I don’t know if the order’s authors would say that that’s the only approach for approval.

We consider each of these on the facts and circumstances, and that is how it should be. So I’m not speculating on any particular product, but I do think that there is interest in this area and I’m hopeful that, ultimately, we’ll be able to get there with an approval.

This article originally appeared on Bitcoin Magazine.

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A Basic Guide to the Digital Age: Breaking Down Congress’ Crypto Hearing

Yesterday, Congress addressed in two full hearings why it’s time to start taking a closer look at why and how digital assets, including cryptocurrencies, are impacting U.S. marketplaces.

The following condensed information is a run-down of what the House Committee on Agriculture and the U.S. Commodity Futures Trading Commission (CFTC) discussed during the hearings regarding cryptocurrency and distributed ledger technology (DLT).

Congress Has a Vested Interest in Securities and Economic Growth

Some might find it odd to see the House Committee on Agriculture represented at a hearing on digital assets and their related technologies. But Chairman Michael Conaway made it very clear why the House Agriculture Committee was there, explaining that they have a vested interest in shaping and constructing the definition of a security because it directly impacts the definition of a commodity.

Working in tandem, both Chairman Conaway and Ranking Member Collin Peterson identified five main goals for clarifying blockchain industry regulation:

  • Promoting a safe, efficient and transparent tokens market
  • Proper regulation doesn’t always mean intrusive regulation
  • Identifying whether tokens are securities
  • Parsing through whether our current laws are appropriate to apply
  • Ensuring enough oversight to help the space grow responsibly

Understanding Why Blockchain Technology Is Valuable

The panel of witnesses sitting on Capitol Hill presented in-depth yet simplistic explanations for what needs to be done. Applying those proposals, however, is an entirely different conversation.

Observing the Communities Using the Technology

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Joshua Fairfield addresses Congress about the value cryptocurrency potentially brings consumers. (Photo credit: HOUSE AGRICULTURE COMMITTEE)

According to Joshua Fairfield — William Donald Bain Family Professor of Law at Washington and Lee University School of Law in Staunton, VA — the potential value of blockchain technology is considerable.

First, the technology has allowed for collaboration among communities of artists.

Second, new forms of corporations have begun to rise up.

Third, there is now a fast and low-cost check settlement opportunity, which helps to pave the way for immediate payments.

Fourth, by digitizing securities, it helps to place everything in an easily accessible format for all participants.

Fifth, having open and low-cost electronic mortgage and secure transactions filing systems in place helps ensure that the recording process of deeds and other property-related documents is secure.

Sixth, it provides for secure international remittances.

Lastly, the potential to bring the voting system onto the blockchain helps to minimize the potential for fraud-related incidents, as we have recently witnessed with Russia in the 2016 presidential election.

Expanding Online Property Rights is Vital to the Growth of Innovation

“Citizens need and want an expansion of their personal property rights online,” emphasized Fairfield. He went on to question whether the U.S. Securities and Exchange Commission’s (SEC’s) Howey Test is still the appropriate standard to apply. Instead, Fairfield proposed a more simplistic test — the “duck” test. “I believe that we should look to the outer bound to figure out what beneficial and damaging uses the technology presents,” he explained. “Look to how the communities are using it — then regulate.”

The Evolution from Tangible Property to Intangible Property

Fairfield pointed out that personal property has had some difficulty entering into the digital space. “We just don’t own that much personal property online,” he stated.

“Consider that people used to have record collections — now they have a subscription to Spotify. People used to have bookshelves — now they have Kindle accounts.”

But this behavior can be attributed to the early days of the internet, primarily movements like Napster, Limewire, Kazaa and online torrents. This led intellectual property (IP) owners to show concern as to the illegal copying and distribution of their work. “It took several decades to develop a technology like the blockchain, that could be traded, held, bought and sold — but not duplicated,” explained Fairfield.

The law professor concluded his proposal by stating that tokens aren’t just used as a security or a commodity, but rather as a way to represent our property interests and rights online — if we let it.  

Harmonizing Technology With Our Constitutional Rights

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Amber Baldet addresses Congress on how it can take a more proactive approach to regulation to support a blockchain becoming a global infrastructure, as the U.S. did with the internet. (Photo credit: HOUSE AGRICULTURE COMMITTEE)

The next witness, Amber Baldet, CEO and co-founder of Clovyr, emphasized the importance in balancing the value of this technology with the need for protecting consumers and national security.

Take a Cautious Approach to Thoughtful, Innovative Technologies

The biggest takeaway from Baldet’s proposals was that we need to understand how to strike a balance with this technology while still respecting our constitutionally protected rights. She emphasized “those technologies that might disrupt a business or add complexity of regulating the internet,” as these have the potential to represent both a critical infrastructure and a publicly shared good.

What’s the Next Killer App?

According to Baldet, the biggest application on the blockchain market is money — specifically, the concept of peer-to-peer (P2P) payments. “These P2P payments will grow into a daily part of our professional and personal lives,” she said.

As we begin looking at different payment instruments, we must go back to fundamentals and ensure we understand the purpose of “bearer instruments.” These are documents that entitle its holder to rights of ownership or title to the underlying property, such as shares or bonds. If we are injecting blockchain technology and cryptocurrency into this space, it becomes even more relevant, as this technology can be applied to many things we own such as mortgages, securities, collectibles, IP rights and personal data. In a way, these new payment systems and accompanying currencies serve as unique “digital bearer assets,” as Baldet described.

Observe Other Countries’ Behaviors

While both the U.S. government and the accompanying marketplace are struggling to understand and apply these technological frameworks, other areas of the world are beginning to embrace the industry despite its gray areas and are learning by doing. Take Malta and Switzerland, for example. Malta has already earned its name as the world’s blockchain island, and Zug, a Swiss city just south of Zürich, has been called “Crypto Valley” for the plethora of blockchain companies operating in its limits.

In addition, Baldet also pointed to countries like Afghanistan and a handful of African countries that are looking to capitalize on the new technology. For example, in Afghanistan, blockchain technology has helped people like Roya Mahboob, CEO and co-founder of Digital Citizen Fund, to enroll over 9,000 Afghan women and girls in education programs. In efforts of empowering women to start their own businesses, the next steps are to begin putting on Bitcoin conferences to help showcase their projects.

Blockchain Technology Is Not the Answer to Every Problem

Most important, Baldet wants the world to recognize that the blockchain is not a panacea. “When it comes to electronic voting, we need to take extreme caution, as we aren’t ready to tackle the complex computer science and coordination problem,” she explained.

Why Venture Capitalists Can Benefit

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Scott Kupor, Managing Partner, Andreessen Horowitz (Photo credit: HOUSE AGRICULTURE COMMITTEE)

“Crypto networks offer a new way to build digital services like any internet application that may exist today, such as ridesharing applications and social media applications,” said Scott Kupor, the managing partner at Andreessen Horowitz Capital Management, explaining that venture capitalists are interested in “crypto networks” as they relate to the crypto ecosystem.

Historical Precedent Is a Good Indicator

According to Kupor, the success of community-based networks can be traced back to two major movements — the open-source movement and the open-protocol movement. The open-source software movement started back in 1983 and was considered to be somewhat of a radical notion at the time.

Why is this relevant? Kupor goes on to explain.

A community of developers would publish their software and offer it up freely for others to modify and incorporate into their own projects. “This led to copyright initiatives,” explained Kupor. Today, open source is the primary development of software for the utilization of any data center, such as Linux- and Android-based applications. “This is extremely relevant when thinking about the potential for crypto networks, because we have platforms that are now able to support a variety of DApps [decentralized applications] and open-source ethos that encourage open innovation.”

On the other hand, open protocols are the structural foundation of the internet we are familiar with today. The idea behind these protocols is that the protocol wouldn’t change and would provide for a steadier process when it comes to understanding how the software infrastructure operates.

Introducing Tokens Into a New Generation

Tokens didn’t exist in prior generations, allowing for a direct financial incentive for community members to develop and govern their networks appropriately. “It’s the glue that binds the members in the community and provides incentives for all market participants,” said Kupor. “Understandably so, it creates a whole new set of challenges for regulators, consistent with recent statements from the SEC.”

Kupor ended proposing that a framework needs to be developed that requires a risk taking but, at the same time, provides for clarity and certainty to market participants, which results in market integrity.

Education Is Key: Don’t Be Foolish and Dismiss the Tech

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Daniel Gorfine, Director of LabCFTC and Chief Innovation Officer of the CFTC, Washington, D.C. (Photo credit: HOUSE AGRICULTURE COMMITTEE)

Daniel Gorfine, CIO of the CFTC and director of LabCFTC, emphasized the need for us to continue studying and learning and to keep pace with an ever-evolving field.

“Given the potential to tokenize a broad range of economic assets, it is important to remind the public that digital assets can also be commodities or derivatives, depending on their term and how they are structured,” explained Gorfine.

“Given its potential and its challenges, the CFTC chairman has made it clear that the proper response by regulators is not to dismiss the entire movement as misguided and foolish, but rather to take the time to learn and facilitate the promise, and guard against risks and bad actors,” he continued.

Opening the Finance Sector Up to the Blockchain

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The Honorable Gary Gensler, Senior Lecturer, MIT Sloan School of Management (Photo credit: HOUSE AGRICULTURE COMMITTEE)

The former CFTC chair, Gary Gensler, provided five reasons for why he believes blockchain technology can make a real difference in the finance sector:

  • It lowers costs and risks in the financial sector.
  • By bringing it into this world of public policy frameworks, it minimizes chances for illicit activities, ensures financial stability and protects investors and consumers.
  • The SEC and CFTC have a role to play, as evidenced by their notices and enforcement actions.
  • The ICO market is ripe with scams and frauds, and bad actors have found out how to use this new currency, including state actors — e.g., recent news of the 12 alleged Russian officials, and talks of Venezuela attempting to raise money off their oil and outrunning the U.S. sanctions policy.
  • There are gaps in our laws because, first and foremost, cryptocurrency exchanges are attempting to act as state money transmitters, similar to how Western Union and MoneyGram operate. This cannot work due to the complexity and traceability issues associated with these exchanges.

Additionally, there is a lack of brokered access, where you don’t have brokers sending off or issuing 1099-B’s to individuals. It’s only now that issuers of securities in the space are coming into this field, but at a very slow rate.

Finally, the unregulated, underlying crypto cash market is a mess, and it becomes very difficult for the CFTC to be able to predict future patterns or behaviors.

Gensler ended his statement by proposing a question on whether the CFTC or some other agency should be given additional authority to regulate this underlying cash crypto market, believing the CFTC to be best suited for the task.

At the end of a very long day of hearings, Congress seemed to be very receptive to the idea of this new technology, but it is still concerned about ensuring that it is properly regulated where appropriate. To view the hearing in full, you can watch it here.

All images authorized by House Agriculture Committee, July 19, 2018.

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Maltese Parliament Passes Three Blockchain Bills into Law

The Maltese Parliament has passed three bills into law that establish a regulatory framework for the country’s blockchain sector, Malta Today reports.

Just last week, the Parliament “unanimously voted” to approve these bills in its second reading. The bills include the Malta Digital Innovation Authority Act, the Innovative Technological Arrangement and Services Act, and the Virtual Financial Asset Act.

Silvio Schembri, the Parliamentary Secretary for Financial Services, Digital Economy and Innovation, shared an update on Twitter about the new development, which he believes will make Malta “the first world jurisdiction to provide legal certainty to this space.”

“The 3 Bills that will regulate DLT [distributed ledger technology] have been approved by Parliament and enacted into law,” the tweet reads.

The blockchain bills are designed to make Malta a hotspot for blockchain and cryptocurrency companies. Schembri believes that they will attract new businesses and put investors’ minds to rest.

While celebrating the new milestone in an update shared on Twitter, Maltese Prime Minister Joseph Muscat said that the new laws will make Malta a “global hub for market leaders” in the blockchain industry.

According to Muscat, the new legislation proves that Malta is the first country globally with a “holistic legislative framework” for regulating the blockchain space. Blockchain companies now have the legal tools necessary to operate in a forward-looking, regulated economy, the prime minister added.

With the new blockchain laws, Malta has distinguished itself as among the world’s most friendly blockchain jurisdictions and has taken yet another step in becoming the world’s blockchain island.

The Maltese government has been working through different avenues to apply blockchain technology to public service. Earlier this year, it partnered with Omnitude to improve the transport system using DLT. In the past, the government has conducted a feasibility study using blockchain technology to record academic certificates.

Many crypto and blockchain businesses have already set up shop in Malta, as well. The most notable ones include OKEx, Binance and BitPay.

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SEC Seeks Comments on Another Bitcoin ETF

The Securities and Exchange Commission (SEC) is seeking comments on another bitcoin-based exchange-traded fund (ETF). The proposal in question calls for the listing and trading of SolidX bitcoin shares, and stems from the VanEck SolidX Bitcoin Trust, which states it will invest in “bitcoin only.”

VanEck and SolidX first joined forces in early June. This will be the former’s third attempt to build a bitcoin investment project from the ground up.

CEO Jan van Eck commented, “We believe that collectively, we will build something that may be better than other constructs currently making their way through the regulatory process. A properly constructed, physically-backed bitcoin ETF will be designed to provide exposure to the price of bitcoin, and an insurance component will help protect shareholders against the operational risks of sourcing and holding bitcoin.”

The SEC is now asking for comments on the Trust’s newly proposed regulatory changes from “interested persons.” Though several companies have tried to list bitcoin ETFs before, concerns regarding the cryptocurrency’s liquidity and its consistent price swings have led to rising concern amongst SEC representatives, which can make the listing process difficult or long-winded.

This may change in the future, however, as officials are now working on a new plan that would ease present legislation and boost low-risk ETF approval rates. The new laws would allow companies that sell ETFs to “launch plain vanilla versions” without requesting or obtaining approvals from respective SEC regulators. Officials say they are hoping to increase both innovation and competition in the financial industry by removing some of the current blockades.

This plan would apply strictly to open-ended ETFs — funds that bear no restrictions or limits on the number of shares they can issue — which already make up most of the ETF space. However, issuers would still be required to obtain permission from the SEC to sell funds under the Investment Company Act of 1940.

Commissioner Kara Stein explains, “The rule would also include many of the website disclosure requirements that are in existing orders such as disclosing the ETF’s current net asset value per share, market price and premium or discount.”

The proposal is garnering praise from several figures and organizations in the finance industry like the Investment Company Institute, based in Washington. Representatives of the trade group commented that they’re in favor of regulated funds, stating, “Investors — and the asset managers who serve them — deserve a more uniform ETF regulatory framework. The time is right to codify these orders into a single rule.”

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EU’s Report on Cryptocurrencies: Says Officials “Should Not Ignore” Them

The EU’s Policy Department for Economic, Scientific and Quality of Life Policies released a report entitled “Virtual currencies and central banks monetary policy: challenges ahead.” Authored by Marek Dabrowski and Lukasz Janikowski, the report comes at the request of the European Parliament’s Committee on Economic and Monetary Affairs, and its findings are a focal point for the committee’s July 2018 Monetary Dialogues.

Referring to cryptocurrencies as virtual currencies (VCs), the report examines the functionality of cryptocurrency as a monetary instrument; its most popular iterations in bitcoin, ether and other popular currencies; and its ramifications for governments and their central banks.

In evaluating cryptocurrencies as a novel, potentially disruptive technology, the report ultimately concludes that “[policy] makers and regulators should not ignore VCs, nor should they attempt to ban them … VCs should be treated by regulators as any other financial instrument, proportionally to their market importance, complexity, and associated risks.”

Even so, the report is measured in its findings, and it does expose the limitations cryptocurrencies and their contingent blockchain technology currently pose. Directing its analysis to the question of crypto’s chances to supplant current central banking practices, the report succinctly concludes “the answer seems most likely ‘no.’”

A Fair and Balanced Analysis

In summary, the report reads as a more comprehensive and balanced analysis for cryptocurrency’s possible economic impact than the Bank of International Settlements own. The Swiss bank’s document, which roused the skepticism of leading industry voices, provided outdated research and findings that conveyed a shallow understanding of the industry outside of Bitcoin’s impact.

By contrast, the European Union’s report plays devil’s advocate for both cryptocurrency’s strengths and its weaknesses and examines the asset class from a variety of angles.

In its introductory analysis, the report consistently returns to the idea that cryptocurrencies are utilized as “a contemporary form of private money.” As private money, they “have no intrinsic value in the sense that they are not linked to any underlying commodity or sovereign currency,” the report claims, though it does admit that “in this respect, they do not differ from most contemporary sovereign currencies.”

The report continues to give a simple and cogent breakdown of cryptocurrency’s economic characteristics and technological features. It continues to provide brief descriptions of the market’s top three most popular assets (BTC, ETH and XRP) and the acceptance of cryptocurrency by popular merchants and services.

Subtitled “Potential economic advantages and disadvantages of VCs (risks and opportunities),” the report then launches into a subsection to weigh crypto’s pros and cons.

To summarize, the authors highlight a number of merit-worthy advantages. They cite the typical rallying cry of crypto-enthusiasts — that the assets allow for low-fee, transnational, fast and near-anonymous transactions. This is especially useful in developing or impoverished nations where citizens lack access to traditional financial instruments, the report states.

This last benefit, however, is marred by the learning curve cryptocurrencies present to new users. The authors also provide counter arguments for cryptocurrency’s promise to deliver fast, low-fee transactions, questioning the long-term sustainability of a blockchain network and the potential for higher fees once mining rewards become a thing of the past.

Among other disadvantages, the report also discusses scalability concerns, the ecological impact of mining and the shady online practices that anonymity can facilitate. Still, the “fear that VCs will facilitate money laundering, the financing of illegal activities, tax avoidance, the circumvention of capital controls … and fraudulent financial practices,” the report states, “may be legitimate in some instances but must not be generalised,” as by and large,“transactions in VCs result from the free business choices of economic agents.”

Delving further into crypto’s limitations, the report continues to point out the inherent risks of investing in a largely unregulated, speculative market, citing the 2018 market’s diminishing returns and the vulnerability of centralized exchanges.

The report finishes the section with a brief overview on the cryptocurrency regulatory policies of the United States, Switzerland and China.

Takeaways

In its second section, the report concludes, “For all of the above-mentioned reasons, one must be prepared that VCs will remain a stable component of the global monetary and financial architecture for several years to come.”

…one cannot exclude the possibility that a number of users and transactions will increase to the extent that VCs will become a fully-fledged substitute of sovereign currencies in the future. We assume that VCs have potential to serve as full-fledged private money regardless of their future share in the overall volume of transactions and financial assets.

As such, Dabrowski and Janikowski warn that “economists who attempt to dismiss the justifications for and importance of VCs, considering them as the inventions of ‘quacks and cranks’ (Skidelsky, 2018), a new incarnation of monetary utopia or mania (Shiller, 2018), fraud, or simply as a convenient instrument for money laundering, are mistaken.”

“VCs respond to real market demand,” they continue, and they believe that attempts to regulate or ban cryptocurrencies out of existence are misguided and inconsequential. Instead, policy makers should provide clear, cohesive regulations that treat cryptocurrency as a formal, taxable asset throughout the globe.

Given their global, trans-border character, it is recommended to harmonise such regulations across jurisdictions. Investment in VCs should be taxed similarly to investment in other financial assets.

All of this said, the authors still hold that cryptocurrencies pose little threat to the central bank status quo, and the report’s third and final section devotes its word count to a brief history of central banking practices and how cryptocurrencies are covering the same historical ground as other private monetary systems.

Ultimately, the report finds that, except in cases of extreme political, social or economic unrest, cryptocurrencies likely will never replace government-issued tender. It does admit that, in these extreme cases, they may stand in as substitute currencies for a faltering national currency in the throes of hyperinflation, as we have seen with bitcoin’s popularity against the bolivar in Venezuela in recent years.

“Despite their technological advances and global reach, VCs are far from being able to challenge the dominant position of sovereign currencies and the monetary policies of central banks, especially in major currency areas. However, in extreme cases, such as during periods of hyperinflation, financial crisis, political turmoil, or war, they can become a means of currency substitution in individual economies,” the report reads.

Even with this analysis, the report ends on an optimistically-balanced note, recognizing that the industry still has legs to run and the possibility of future innovation to take it further. Checking itself on its prior claims, it suggests that, with the right technological advancements, cryptocurrency’s potential should not be underestimated.

One cannot rule out that future progress in the area of information technologies can bring even more transparent, safe, and easier to use variants of VCs. This might increase the chances for VCs to effectively compete with sovereign currencies, including the major ones.

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A Nuanced Look At Crypto Assets as Securities In Light of SEC Comments

On June 14, 2018, the Securities and Exchange Commission (SEC) director of corporate finance made waves in the cryptocurrency space when he commented at Yahoo Finance’s All Market Summit: Crypto that ether is not a security. The statement carries weight.

His words led to a flurry of speculation about the potential implications of what this means for Ethereum as well as the larger cryptocurrency ecosystem with regards to development and regulation.

It should be noted that the shifting status of regulatory terms can be confusing and contrary to the logic of programming languages that cryptocurrencies use. As a result, Adam B. Levine dedicated much of Episode #371 of his show, Let’s Talk Bitcoin, to clearing up misconceptions about the SEC’s stance. To do this, he invited lawyer and programmer Stephen Palley for an in-depth interview.

Discretion in the Legal World

Levine began by reading an abridged version of the SEC director’s speech, or as he dubbed it, “When Howey Met Gary.” Next, Levine spoke with Palley to hammer out what the speech is stating. In the speech, Director William Henman recalled the 1946 Supreme Court ruling of SEC v.s. W.J. Howey Co., which first laid out the terms for what defines an asset, such as land purchases or services contracts, to be a government regulated by the Securities Act.

Under this act, the form of the contract itself is of less importance than the actual economic substance of these transactions. This means that any number of assets can still qualify as securities as long as they fulfill certain qualifications.

Qualifications include:

  • Assets being specifically promoted by a group with a controlling interest in daily operations;
  • Assets being purchased by consumers under some reasonable expectation of profit; and
  • Assets wherein there is significant asymmetry of information between the promoters and purchasers of an asset.

Securities regulations primarily exist to ensure a third party, namely a regulatory entity, is well-informed enough to judge if there is a reasonable guarantee of a safe investment, without compromising trade secrets that promoter firms do not want made public.

Furthermore, Henman stated that the decentralization offered by cryptocurrency models such as ether prevent a single promoter entity from actually gaining significant leverage in information or control that consumers would need protection from. This means certain applications of cryptocurrencies can be sold as securities, but the format itself does not require this level of regulation.

A Legal Perspective

Palley, a practicing lawyer of 20 years, explained some of the concerns that have made this possible ruling particularly sticky for the world of cryptocurrencies. Palley claimed that specific types of legal contracts are similar to executable programmable code, yet legal verdicts operate in a sufficiently more complex way. Legal verdicts require contextual considerations that must be made of the technical form as well as the economic realities of various interactions. This ambiguity is often understood by programmers that, legally, the most uncharitable interpretation of a ruling will be applied unilaterally.

Palley gave an example by comparing the factors which make ether not a security while conceivably making ripple qualify as a security. Evidence for this is that the original developers of Ethereum have largely distanced themselves from the project so that they do not form a distinct entity still invested in the profit and daily operations of this platform. Ripple, on the other hand, is still one entity. Ethereum also held back a much smaller percent of ether tokens for their developers while Ripple held onto enough tokens to retain a controlling interest. For these reasons, there are easily observed asymmetries in the Ripple platform that could well classify its assets as securities.

The Future of Crypto-Based Tort Action

Palley went on to ruminate on the implications that recent lawsuits against Tezos might have on future civil suits against cryptocurrency developers. Using his inside experience as a practicing lawyer working in the cryptocurrency space, Palley stated that many civil class-action suits are unable to find plaintiffs even in the event of potentially dubious actions for the simple reason that no one wants to sue a firm that is continuing to make them money. After all, tort actions of this nature typically take place as an attempt to jump on potential violations to regain lost investment money through damages if the investments themselves are no longer profitable.

Palley claimed that the lawsuits against Tezos fall under this category. He stated that Tezos has conducted its own business with enough good faith that the plaintiffs allege that the business model itself is somehow improper, rather than Tezos specifically engaging in improper decisions at the micro-level. Under this trend, Palley speculated that the most significant factor in uncharitable interpretations of cryptocurrency-related laws will take place under market contracts for the space as a whole.

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Malta Passes Favorable Cryptocurrency Laws in Next Step as a Blockchain Island

The Maltese Parliament has voted into law three cryptocurrency and blockchain bills, making Malta one of the most desirable locations for setting up blockchain enterprises.

According to legislative records, the bills, which were introduced to the parliament by Parliamentary Secretary for Financial Services, Digital Economy and Innovation Silvio Schembri, were passed unanimously on Tuesday, June 26, 2018.

The bills-turned-law detail the regulation of ICOs and cryptocurrencies and the process for setting up crypto-based businesses in Malta. The news, which Schembri shared via a tweet, makes Malta the first country to enact such laws.

“Today, Maltese Parliament unanimously approved three bills on DLT/blockchain, a 1st in the World. Honored to have driven these bills,” he said.

The three bills passed into law are “The Virtual Financial Assets Act,” “The Malta Digital Innovation Authority Act,” and “The Innovative Technology Arrangements and Services Act,” respectively.

The Virtual Financial Assets Act (VFA)

The VFA will regulate initial coin offerings. The law requires new companies raising capital through ICOs to publish white papers that outline a detailed description for the entire project. Issuers are also expected to make their financial history public.

The Malta Digital Innovation Authority Act

This law formalizes regulatory procedures for the cryptocurrency and the blockchain industry. It also establishes the Malta Digital Innovation Authority (MDIA), which will serve as the regulatory body for the industry. The functions of the MDIA will be carried out by a Board of Governors, headed by a CEO. Local news outlet the Times of Malta confirmed the appointment of Stephen McCarthy as the first chief executive of the Malta Digital Innovation Authority.

Technology Arrangements and Services Bill

This law details the registration and certification of technology service providers and technology arrangements, and it focuses on the registration of exchanges in Malta. Industry insiders believe this bill was created to make Malta the destination of choice for cryptocurrency exchanges.

Malta, which, even before these laws, was known as a friendly hub for blockchain businesses, has already attracted some crypto heavyweights such as OKEx and Binance.

The new bills are expected to guide the government on how to embrace the technology and achieve its aim of becoming a hotspot for crypto and blockchain businesses.

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SEC Director of Corporate Finance: Ether Is Not a Security

In an informal statement made at Yahoo Finance’s All Market Summit: Crypto, William Hinman, the United States Securities and Exchange Commission (SEC)’s director of corporate finance, indicated that the regulatory agency has no plans to deem ether a security.

“… based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions,” Hinman said in a speech at the summit.

Along with ether, Hinman stated that the SEC would not classify bitcoin as a security, either. Rather, both cryptocurrencies function similar to commodities like gold, silver or oil, the agency believes.

But not all coins are created equal, Hinman expressed in his speech, and the SEC’s leniency on crypto’s top assets won’t relieve tokens from scrutiny. Tokens and Initial Coin Offerings, he continued, are most likely to be considered securities. The distinction lies in how the asset is offered or sold to the public.

“… strictly speaking, the token — or coin or whatever the digital information packet is called — all by itself is not a security … But the way it is sold — as part of an investment; to non-users; by promoters to develop the enterprise — can be, and, in that context, most often is, a security — because it evidences an investment contract,” Hinman stated.

This analysis seems to prioritize circumstance over semantics when deeming a token’s securities status. Projects will often dance around their token’s nomenclature to avoid self-branding as something that could be seen as a security, but Hinman conveyed that the SEC isn’t fooled by the verbal footwork. He made it clear in his speech that “simply labeling a digital asset a ‘utility token’ does not turn the asset into something that is not a security … the economic substance of the transaction always determines the legal analysis, not the labels.”

Hinman appeared to contradict himself when he dove into an analysis of token sales likely falling under the blanket of securities, only to dismiss ether from this classification. But this absolution comes from “putting aside the fundraising that accompanied the creation of Ether,” he said, as a token or coin can’t be deemed a security if no central organization or company is directing it after launch.

“Can a digital asset originally sold in a securities offering eventually be sold in something other than a security?” he posits, eventually concluding that it cannot. “But what about cases where there is no longer any central enterprise being invested in or where the digital asset is sold only to be used to purchase a good or service available through the network on which it was created? I believe in these cases the answer is a qualified ‘yes.’”

The speech shed substantial clarity on a question that has loomed over the industry for some time: namely, whether or not ether would be ruled as a security. And, while this speech is sure to quell the anxieties of enthusiasts and investors alike, it leaves a gray area open for the SEC to color in its treatment of each individual token and coin under Hinman’s interpretation.

Still, the developments are positive for an industry that, in the context of the United States, has made a slow crawl toward regulatory legitimacy.

“We are glad the SEC agrees with our long held analysis of how securities law applies to decentralized cryptocurrency networks like Bitcoin and Ethereum,” Coin Center Executive Director Jerry Brito said in a statement. “We are thrilled to see it take a strong pro-innovation approach to this nascent technology. With this guidance, the SEC is showing that taking a pro-innovation approach does not have to come at the expense of protecting investors.”

While the words carry weight from one of the SEC’s highest officials, it’s worth noting that they were spoken somewhat informally and may not represent a cohesive message across the SEC’s regulatory staff.

This morning, Valerie Szczepanik, the SEC’s first crypto czar, issued what looks like a caveat on this front, stating in a panel at the summit that individual staffer comments may not be wholly in line with the SEC’s official stance.

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India’s Central Bank Admits to Banning Crypto Accounts Without Research

]In a fresh new twist, the Reserve Bank of India (RBI) has admitted to issuing its ban on cryptocurrency-related accounts spontaneously, without taking time to study and understand how cryptocurrencies work.

In reply to a Right to Information query filed by a local lawyer with the Twitter handle Blockchainlaw91, the bank revealed that its decision to ban cryptocurrency-related accounts in the country was made without due consultation or study.

How It Started

India’s central bank, the Reserve Bank of India, started warning its citizens against the dangers of investing in cryptocurrencies in 2013, which was followed by two other warnings in 2017, before coming down hard on the industry earlier this year.

On April 5, 2018, RBI published an announcement, stating that it was banning the country’s banks from dealing with any business or “entities dealing with or settling [virtual currencies].”

RBI Deputy Governor B.P. Kanungo who spoke to reporters said there was a three-month grace period for businesses providing such services to wind down operations.

The bank said the move was motivated by the need to protect Indian customers and prevent money laundering.

In 2017, prior to the ban, the Indian government had formed a committee, which included the RBI, with the aim of studying virtual currencies and how they work.

The committee had suggested banning cryptocurrency exchanges in the country, but the surging price of bitcoin toward the end of the year led to a quick reversal of that position and the creation of a new panel to study cryptocurrencies.

Surprisingly, in its reply to Blockchainlaw91’s query, the Reserve Bank of India revealed that its decision to ban the bank’s activities with crypto-based businesses was not backed up by any independent study or research.

Petitions and Migration

The Internet and Mobile Association of India (IAMAI) — which includes Indian crypto exchange Zebpay — have filed a writ petition to overturn RBI’s ban which prohibits banks from dealing with crypto-based businesses. The case is currently at the Supreme Court with a hearing date fixed for July 20.

Since the ban on crypto, there have been claims that blockchain businesses could be forced overseas.

Joel John, a research analyst at a U.K.-based blockchain company who spoke with the local media, believes crypto companies can easily migrate to friendlier countries to set up new entities. He said: “Companies moving abroad is not a new trend, but the regulatory complexities faced by blockchain companies have accelerated it.”

It is gradually becoming a pattern for governments to make spontaneous decisions on cryptocurrency without first seeking to understand how it works. Russia and Japan have each tried to ban crypto businesses before ultimately softening their stances.

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EU’s European Blockchain Observatory and Forum to Host Blockchain AMA

The European Union (EU) has announced that it will host an online Ask Me Anything (AMA) session on June 18, 2018, at 6 p.m. CEST. The event, organized and hosted by the European Blockchain Observatory and Forum of the EU, will last for 90 minutes and cover blockchain technologies with in-depth explanations, interactive discussions with panelists and public questions answered live.

The European Blockchain Observatory and Forum was created as a European Parliament pilot project with a mission to accelerate blockchain innovation and the development of the blockchain ecosystem within the EU and establish Europe as a global leader in the field. The Blockchain Observatory and Forum is currently operating under the European Commission (EC)’s Directorate General for Communications Networks, Content and Technology (DG CONNECT). Their partners include ConsenSys AG (general contractor), the University of Southampton, the Knowledge Media Institute at the Open University, University College London and the Lucerne University of Applied Sciences and Arts.

The event will be streamed live on YouTube. Viewers are invited to comment and ask questions via Twitter. To participate, viewers should include both #AMAblockchain and @EUBlockchain in a tweet. For example, “What is the official position of the EU on cryptocurrencies #AMAblockchain @EUBlockchain?” Selected tweets will be addressed and answered live.

“Technologies like blockchain can help reduce costs while increasing trust, traceability and security,” said Andrus Ansip, vice president for the Digital Single Market, in a February 2018 EU press release announcing the launch of the EU Blockchain Observatory and Forum.

“They have huge potential for making social and economic transactions more secure online by guarding against an attack and removing the need for any middleman. We want to build on Europe’s substantial talent base and excellent startups to become a leading world region that will develop and invest in the rollout of blockchain.”

The announcement emphasizes that the EU Blockchain Observatory and Forum will play an active role in helping Europe to seize new opportunities offered by blockchain technology, build expertise and show leadership in the field, and promote an open forum for blockchain technologists, innovators, citizens, industry stakeholders, public authorities and regulators.

“I see blockchain as a game changer and I want Europe to be at the forefront of its development,” said Mariya Gabriel, commissioner for the Digital Economy and Society. “We need to establish the right enabling environment — a Digital Single Market for blockchain so that all citizens can benefit, instead of a patchwork of initiatives. The EU Blockchain Observatory and Forum is an important step in that direction.”

The announcement states that the Blockchain Observatory and Forum is intended to support the EC’s work on FinTech, which is considered a priority of the EC and is expected to play a major role in achieving the objectives related to the development of the single market, Banking Union, the Capital Markets Union and retail financial services.

“Among the many technologies that are driving digital innovation, blockchain has the potential to be truly transformative for financial services and markets,” said Valdis Dombrovskis, vice president responsible for Financial Stability, Financial Services and Capital Markets Union. “The Blockchain Observatory and Forum will monitor developments and also inform our policy making.”

TNW notes that the Blockchain Observatory and Forum has been hosting a series of workshops and panel discussions to figure out the best ways to approach this fledgling technology in the age of the GDPR. The recordings are online on YouTube.

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Proposed Regulations Could Cause Major Shifts in Canadian Crypto Businesses

Canada’s government has released draft regulations for “virtual currencies” with a consultation period of 90 days, saying that proposed regulatory changes could mean a loss of $60 million over 10 years for businesses that deal in cryptocurrencies but will improve Canada’s international reputation and make it easier for crypto businesses to deal overseas.

The Canadian crypto business community is still assessing the new proposed regulations but a number of experts have told Bitcoin Magazine that the impact on the community will be “massive” and “significant” and may result in a shake-up and consolidation of companies, including blockchain companies currently in the space.

Amber D. Scott, CEO of Outlier Solutions, a company that focuses on helping bitcoin and blockchain crypto startups to understand and comply with government regulations, said:

“If the definitions are broadly interpreted, there could be significant dislocation in both the cryptocurrencies and blockchain communities that were not expecting to be regulated in this way. This includes any blockchain company that has issued, sold or traded a token that fits within the definition of ‘virtual currency.’”

Among other proposals, the new regulations will require firms (including exchanges) to keep detailed records of users and inform the government about suspicious activities, provide written policies and procedures, undergo a risk assessment and be ready for audits.

Jason Beitchman, a commercial litigation lawyer in Toronto with experience in anti-money laundering and cryptocurrency litigation, told Bitcoin Magazine:

“The impact on the cryptocurrency business is going to be massive. I can see it playing a significant role in allowing some market participants to rise to the top and separate themselves from others who don’t get out ahead of compliance issues.”

Beitchman notes that some of the language in the draft regulations seems strangely vague and unclear:

“I found the language in the second part of the definition of ‘virtual currency’ to be curious: ‘information that enables a person or entity to have access to a digital currency.’ What kind of information? This seems unusually vague and broad. Isn’t a webpage explaining how to trade in bitcoin ‘information’ that would enable a person to have access to a digital currency?”

Beitchman credits crypto companies for their generally imaginative marketing and innovative technology but says:

“… in time, cryptocurrency businesses will be forced to focus on the more brown-bag aspects of long-term and self-sustaining financial services businesses. These include a focus on operations, administration, compliance and legal. I expect we will see some portions of the sector embrace this development and other parts either ignore it or avoid it, at their peril.”

Evan Thomas, who practices compliance law in Toronto, told Bitcoin Magazine:

“Speaking for myself only, the regulations will undoubtedly have significant implications for many cryptocurrency and blockchain businesses.”

Thomas also reiterated that the regulations were not very clear on things like defining virtual currencies. The language used could mean a whole raft of businesses that deal in value transfer services.

“The commentary with the draft regulations suggests that ‘dealing in’ activities ‘include virtual currency exchange services and value transfer services,’ but there are many other businesses, such as miners, mining pools and developers of tokenized applications, that could be considered ‘dealing in virtual currencies,’ depending on how that phrase is interpreted,” he said.

Scott agrees that the language could be considerably clearer:

“The biggest issue that I see is that some of the definitions can be interpreted very broadly. Unfortunately, regulators sometimes get focused on the ‘letter’ rather than the ‘intent’ of the regulations. In practice, this means that if the Department of Finance doesn’t tighten up some of the wording or provide additional exclusions, business models that don’t really present much money laundering or terrorist financing risk (like in-game tokens) or things that are already regulated (like securities tokens) may be swept in.”

What Happens Now?

There’s a 90-day comment period, then the Department of Finance redrafts the final version. Once this is published, there will be a 12-month transition period for compliance, meaning that it will likely take at least 15 months or longer for everything to be fully in force.

Even though this is a draft, Scott noted, the final versions of regulations like these are usually very similar to the draft version.

“I don’t think that we’re likely to see substantial shifts, but there are real opportunities to refine the content (better definitions, exclusions for things that shouldn’t be captured, etc.) for interested companies and organizations.”

Beitchman’s view is that there is not likely to be a significant challenge from the crypto community and that other types of financial services may be better able to afford to make presentations to the Department of Finance. He further suggested that some of the significant issues that could arise will be resolved in the courts over the next 5–10 years through regulatory or litigation proceedings.

“Advocacy and lobbying activity is a highly sophisticated business strategy that requires a clear vision, funding and either large market share or wide-spread consensus,” he said. “While I am hopeful that there will be a positive dialogue with Finance, there are certainly challenges in advancing cryptocurrency interests here.”

“You also have to look at the sectors that traditionally have a large advocacy and lobbying presence in financial services and consider whether and how those sectors may be participating in the comments process,” he added.

Scott’s company, Outlier Solutions, will be active in the comment process:

“I expect that we’ll be spending the next 90 days telling people not to panic. We participate in a number of industry groups and will be submitting comments through them, as well as on our own behalf. We’ve also set up a survey for community members that want to comment but may be reticent to have their names attached to comments (so no personal information is required).”

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Colombian Banks Shut Down Buda Crypto Exchange Accounts

Colombian banks have closed all the accounts of South American cryptocurrency exchange Buda.com without warning or explanation.

The company experienced a similar issue in Chile some months back, where several banks decided to close its account along with those of several other exchanges.

According to local news, the move by the Colombian banks was unexpected, and the banks didn’t disclose why it was closing the accounts. Buda.com sent an email to its customers where it explained the problems it was facing which were affecting withdrawals.

The exchange said the closure of its accounts was sudden which affects the company’s operations and its users seeking to access their funds in Colombian pesos.

Buda.com CEO Alejandro Beltrán said the closed accounts were domiciled with Bancolombia, BBVA and Davivienda.

Buda.com started noticing irregularities on the Bancolombia platform before bank officials told the exchange its account had been closed.

The move by the banks might be linked to an internal circular from the Colombian Financial Superintendent wherein banks were advised not to interact with crypto platforms.

Beltrán, however, believes the circular was a recommendation to the banks, not an order.

Other Colombian exchanges such as BitINKA and Panda Exchange haven’t reported any issues with the banks.

A day before the banks closed Buda.com’s accounts, the Colombian Senate held a session on the potential of cryptocurrency and blockchain technology.

Senator Navarro Wolff, who convened the Third Senate Committee, stated that blockchain technology can be beneficial to the country in the areas of finance, electoral systems and management of public contracts. But Wolff also stipulated, “Regulation is required to protect the consumer and the user.”

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