A Global Perspective
With the year, and decade coming to a close, we at securities.io thought it prudent to gauge global industry sentiment as it stands. What is the current state of the digital securities sector? Is it better today than it was yesterday? Maybe those ‘in-the-know’ feel as though strategic work still needs to be done.
These are all queries that many may have, including us as securities.io. With this in mind, we have reached out to various representatives within the sector. Each hailing from differing regions of the globe.
The following commentary sheds insight into their thought processes, and how regulatory environments may shape market perception.
Africa, Asia, Europe, North America, and the United Kingdom. These are the regions which we have decided to look at on an individual basis.
The following companies and their leads have taken the time to share their thoughts.
Penny for your Thoughts?
Our methodology was simple – ask the same 5 simple questions pertaining to digital securities to 5 CEO/Managing Directors from around the world.
The goal? Gain insight into the variances in perception and adoption of the sector based on geography. Something we feel is an important metric, given the potential of the sector to influence FinTech on a global scale.
North America – Dave Hendricks, CEO of Vertalo
Vertalo is a U.S. based company, which maintains operations in the state of Texas. Led by CEO, Dave Hendricks, Vertalo has managed to establish themselves as a leader within digital securities.
Their unique approach, acting as an ‘operating system’ for digital securities, has seen the company experience growing levels of adoption over 2019. Whether providing cap-table management services to Prime Trust, or receiving a Transfer Agent letter of effectiveness, Vertalo has shown their versatility and look primed to continue this trend into 2020 and beyond.
In your opinion, what represents the largest industry achievement/hurdle cleared, to date?
The greatest achievements of this industry can’t be measured in number of issuances or the size of any particular issuance. What has been so amazing about this industry is the development of so many teams that are building legitimate companies around the world to harness this technology for the purposes of modernizing the ownership and trading of private, real world assets.
With the aforementioned achievements laying a foundation for the industry, what remains as the biggest obstacle moving forward?
Each and every company that operates in our particular Digital Asset sector has to swivel their seat between a focus on business development and the challenges posed by regulatory compliance.
The “all-in builders” of this industry share a vision and mission to legitimize the trading of private assets using smart-contract based technologies. The level of commitment that is required to design and develop technology that simultaneously complies with and evolves regulated markets cannot be understated. It is challenging to persuade regulators that you and your brethren are an improvement to projects that – less than two years ago – were trying to fleece the public through exit scams.
With regards to ‘friendly’ regulation and government acceptance, have you noticed any countries leaving the rest behind?
The countries where things are “easiest” are possibly the worst countries to use as examples. While they may appear to be moving more quickly than others, what they are really doing is enabling questionable issuers to fleece naive investors with fewer restrictions.
It’s difficult to rank the best countries for Security Token issuers and technology providers; I would maintain that the tightest regulatory regimes (like the United States) will end up being the greatest digital asset markets for the same reason that they are the best markets for legacy analog assets: investor protections.
It’s my belief that the USA will end up leading this sector in terms of clarity and number of quality offerings in the next 18 months – and it will do that with the fewest changes to its underlying securities law. After the USA, I would look at Korea, Japan, Singapore, the UK, and Germany as major markets. Once the US offers the kind of clarity that we can expect, the market will absolutely explode and normalize.
Much has been made about the transformative capabilities of digital securities. With the potential to affect change in many industries, which do you feel stands to benefit the most from the digital securities sector?
Real Estate is clearly the major beneficiary for digital securities, specifically the Private REIT Sector. After that, the US VC-funded asset class looks like a solid candidate for ‘direct ownership’ and ‘direct listing’ capabilities that are produced by digital asset tokenization.
Looking forward, where along the growth trajectory do you see digital securities in the next two, and five years?
Digital Securities will be a multi-billion business in two years and normative in five, but this type of adoption is dependent upon the regulatory question.
Well there you have it! As 2019 is about to wrap up, there is a clear trend evident within the sector – a positive one. While many hurdles have been met and cleared, there remain many more on the horizon. Despite this, the potential that digital securities hold to reshape FinTech remains as tantalizing as ever.
We will touch base in a few months to re-gauge industry sentiment with a new set of influencers from around the world. Until then, stay informed by frequenting securities.io!
Supreme Court Reins in SEC on Disgorgement
While the SEC holds a huge amount of influence and power, they do not operate without oversight, themselves. This was on full display on Monday, as the U.S. Supreme Court issued a new ruling on SEC authority surrounding disgorgement.
Essentially, it was ruled that, while the SEC will retain the ability to seek disgorgement from offending parties, it will be limited to their profits. This means that if a company raises $50M through illegal means, the SEC can only seek to retrieve funds up to the $50M minus any genuine operating costs.
The purpose for this limit is a simple one – disgorgement is permitted as a remedial, rather than punitive, action. If the SEC were to seek funds exceeding what was raised, it would no longer represent a retrieval of funds, but a punishment for their actions.
Furthermore, the ruling indicates that funds, retrieved through these means, are to be used as compensation for victims that have lost money.
For those unfamiliar with disgorgement, it refers to the repayment of funds received/generated by parties which violated existing laws.
In recent years, disgorgement has been a commonly used method of the SEC, as made evident in various cases stemming from the 2017 ICO boom.
For those interested, the entirety of the U.S. Supreme Court’s ruling can be found HERE. While there are various intricacies involved, the court’s decision can be broadly summarized by their statement, as follows.
“The Court holds today that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under §78u(d)(5).”
As aforementioned, the SEC has turned to disgorgement on various occasions, as of late. The following articles are a few examples of it being used in crypto based cases.
Based in the United States, the SEC is a government run regulatory body. This outfit is tasked with fostering safe, and transparent, markets surrounding securities. This entails both the creation, and enforcement, of laws surrounding the sector.
SEC Chairman, Jay Clayton, currently oversees operations.
In Other News
While Jay Clayton may still be in charge at the SEC, his time at the helm may soon be coming to a close. We recently touched on a tricky situation, currently evolving, which would see Clayton depart the SEC for a position as an Attorney General in Southern New York.
SEC Chairman Jay Clayton Moving On?
Caught in the Middle
Jay Clayton, Chairman of the SEC, has found himself caught in the middle of a tricky situation. The story goes like this:
On June 19th, U.S. Attorney General, William Barr, announced the Trump administration’s intent to name Jay Clayton the new U.S. Attorney for Southern New York.
This announcement soon became a major point of contention, as Geoffrey Berman (the current U.S. Attorney for Southern New York) had refused to abandon his post. This stance was changed, however, when assured that his departure would not derail current investigations.
Replacing Geoffrey Berman for the interim is Deputy U.S. Attorney, Audrey Strauss.
While pure speculation at this point, many believe that these actions were taken due to ‘burnt bridges’ between Berman and the Trump Administration. More specifically, Berman was/is at the helm of various corruption inquiries into associates of the POTUS.
The situation has seen various senators weigh-in on the situation. Notably, Senator Chuck Schumer believes an immediate investigation should be launched into the situation. Furthermore, he had strong words for Clayton, himself, stating,
“Jay Clayton can allow himself to be used in the brazen Trump-Barr scheme to interfere in investigations by the U.S. Attorney for SDNY, or he can stand up to this corruption, withdraw his name from consideration, and save his own reputation from overnight ruin.”
Back to Roots
If this move were to happen, it would not necessarily mark a return to his roots. Prior to his tenure at the SEC, Jay Clayton was a seasoned corporate lawyer, with decades of experience. What he lacks, however, is experience as a prosecutor – typically a prerequisite for Attorneys Generals.
While his duties stretched far beyond regulating the burgeoning blockchain sector, Clayton developed a complex relationship with the community through his time at the SEC, thus far.
Clayton has many detractors from the crypto community, as he has had a hand in the denial of many Bitcoin ETF applications.
At the end of the day, however, the world of crypto remains rife with scams,y. Despite having massive potential, Clayton has, for the most part, made sound decisions in regulating the growth of crypto base endeavours.
Be Careful what you Wish For
While Clayton may not be pro-crypto, there are many examples throughout his tenure of openness towards these young markets.
Those excited to see his potential exit should be wary, as his successor may very well adopt a strong anti-crypto sentiment – something which could prove to be very harmful for a sector still in its infancy.
A Short Run
If opting to leave his post at the SEC, Clayton will have completed a roughly 3 year stint at its head. So far, no word has been given on a possible successor as the Chairman of SEC.
For decades, the position of Chairman at the SEC has been a revolving door. The last individual to serve longer than 4 years was Arthur Levitt, during the Clinton Administration.
Word of Clayton’s potential replacement comes 1 year after the CFTC saw their very own chairman, J. Christopher Giancarlo, step down. During their time spent at the helm of their respective organizations, both, Clayton and Giancarlo, were vocal on their approach towards blockchain. While Clayton has remained more conservative, to this date, Giancarlo was viewed as more progressive and welcoming to change.
OSC Finds Extensive Evidence of Fraud/Theft by Gerald Cotten and QuadrigaCX
Over a year has passed since the demise of popular Canadian exchange, QuadrigaCX. Despite this length of time, new findings are still being released surrounding the peculiar chain of events that saw $215 million go missing – a total representing the holdings of over 75,000 clients.
While the actions of Gerald Cotten and QuadrigaCX are, without doubt, a blight on the cryptocurrency industry, it is important to remember the old adage ‘do not paint with a broad brush’.
The OSC has, thankfully, recognized this, and taken the time to ensure readers that they are not condemning the sector as a whole, in their report.
“The misconduct we uncovered in relation to Quadriga is limited to Quadriga and should not be understood as applying to the crypto asset platform industry as a whole. Properly conducted, crypto asset trading is a legitimate and important component of our capital markets. We remain committed to working with this industry to foster innovation. Financial innovation has always been critical to the health of our economy and the competitiveness of our capital markets.”
Now we move on to the bad. After a thorough investigation, the OSC has determined that QuadrigaCX operated, essentially, as a Ponzi scheme underneath a ‘layer of modern tech’. This Ponzi scheme is believed to be orchestrated by the late founder of QuadrigaCX, Gerald Cotten.
Furthermore, due to the custody model utilized by the exchange, the OSC believes QuadrigaCX to have been in consistent violation of securities laws.
“…whereby Quadriga retained custody, control and possession of its clients’ crypto assets and only delivered assets to clients following a withdrawal request—meant that clients’ entitlements to the crypto assets held by Quadriga constituted securities or derivatives.”
To this day, many of those affected by the debacle caused by Cotten have remained hopeful that the lost keys to his crypto wallets would be found. This was due to a belief that these wallets contained much of the missing funds. Unfortunately, the OSC has indicated that this is a fallacy. Rather, the vast majority of missing funds were due to Cotten’s illegal trading activity.
“It has been widely speculated that the bulk of investor losses resulted from crypto assets becoming lost or inaccessible as a result of Cotten’s death. In our assessment, this was not the case. The evidence demonstrates that most of the $169 million asset shortfall resulted from Cotten’s fraudulent conduct, which took several forms.”
If that wasn’t bad enough, the OSC concedes that, due to the circumstances (QuadrigaCX bankruptcy, and Cotten’s death), there exists very little room for recourse.
In their report, the OSC notes that roughly $215 million is owed to QuadrigaCX customers. They provide the following breakdown, shedding light on where the money has gone.
- $115 million
- Lost by Gerald Cotten through illegal trades on QuadrigaCX
- $46 million
- Recovered funds, now in the possession of a trustee
- $28 million
- Lost by Gerald Cotten through illegal trades on external exchanges
- $23 million
- Miscellaneous losses yet to be accounted for
- $2 million
- Funds stolen by Gerald Cotten to fund his lifestyle
- $1 million
- Operational losses
Whether through misappropriation, or illegal trades, the late Gerald Cotten is believed to be directly responsible for roughly $145 million lost in client funds.
Words of Warning
Throughout their report, the OSC doesn’t mince words when addressing companies still operating in the blockchain industry – Contact the OSC to see if registration is required under current laws.
They explicitly note, on multiple occasions, that securities laws apply in many instances, even when the traded assets are not securities. The deciding factor comes down to how these assets are handled by exchanges.
“A platform would generally not be subject to securities legislation if the underlying crypto asset being traded is not a security or derivative, and there is immediate delivery of a crypto asset to the client after a transaction…In contrast, if a platform retains possession and control of the crypto assets being traded on the platform, securities law may apply.”
While this distinction may be small, it is an important one. The OSC is imploring Canadian exchanges to reach out and determine where they fall within regulatory guidelines.
“Platform operators should be aware that, depending on their business model, they may have to register with the OSC and they should take appropriate steps to comply with Ontario securities laws…Platforms should review their operations to ensure that they have procedures in place to manage risks to clients and that they are accurately disclosing key information about their operations to clients.”
The Ontario Securities Commission (OSC), is a regulatory body, tasked with ensuring fair and transparent markets. This is done through the creation, and enforcement, of laws surrounding securities in the province of Ontario.
CEO, Grant Vingoe, currently oversees company operations.