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A Look at Europe’s Security Token Legislation

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Liechtenstein via TripSavvy

Europe continues to see more counties taking a pro-crypto stance. Countries such as the UK, Switzerland, and Malta, have already made huge strides towards furthering their respective positions in the market. While there are many contributing factors behind these moves, the introduction of security tokens has played a huge roll in these countries decision.

Security tokens allow for the digitization of traditional investments. This method is called tokenization. Tokenized assets are considered more stable than traditional cryptocurrencies by most countries. Currently, security tokens fall under the EU’s MiFIDII regulations.

MiFID II

The EU instituted MiFID II regulations on January 3, 2018. This legislative framework provides investors with added protections. Additionally, MiFID II regulations improve the functionality and efficiency of the market. The legislation is a follow up to the original MiFID (Markets in Financial Directive) regulations which have been in operation since November 2007.

Liechtenstein

The sixth smallest country in the world, Liechtenstein continues to develop their blockchain sector at an impressive rate. Despite being only 62 square miles in total, this tiny country ranks among the highest in terms of GDP per capita. In October 2018, the country released a public draft titled the “National Blockchain Act.”

The document highlighted the counties desire to further their blockchain aspirations. The move was quickly followed by an announcement by the country’s Union Bank AG. Here, the bank described their intention to be the first regulated bank issuing a security token. The bank looks to create a token for interbank activities such as transferring large amounts of funds internationally.

Germany

Germany does not consider cryptocurrencies as financial instruments. In September 2018, the country determined that Bitcoin traders don’t need any licensing and that trading cryptocurrency should remain legal. This was a major ruling in favor of crypto investors. This ruling meant that crypto investors did not need to adhere to Germany’s securities regulations.

Berlin via City Break

Berlin via City Break

In December 2018, Germany’s second largest stock exchange announced plans to launch a crypto token exchange. The Boerse Stuttgart Group partnered with the local Fintech firm SolarisBank to make the project a reality. The exchange’s release date is Q3 2019. According to developers, a variety of cryptocurrencies including utility, security, and exchange tokens will be hosted.

Switzerland

Switzerland has long been a financial epicenter in Europe. Swiss officials are keen on extending their financial influence into the blockchain sector. The country recently opened a blockchain business sector dubbed the Crypto Valley. Here, blockchain startups receive reduced taxes and other benefits provided by the Swiss government.

Aside from financial benefits, Swiss-based blockchain firms benefit greatly from the country’s clear cut blockchain regulations. The Swiss Financial Market Supervisory Authority (FINMA) breaks tokens into four distinct categories. These categories include asset, payment, utility, and hybrid tokens.

Estonia

Estonia was among the first EU members to legalize crypto activities. The country already approved over 900 crypto licenses since changing regulations last year. Those licensed include a variety of crypto businesses such as exchanges, startups,  and blockchain tech firms. Around 400 of the licenses issued belonged to crypto wallet providers according to recent reports.

Estonia managed to go from the poorest country in the EU to a thriving economy through a combination of factors. Tax incentives, a friendly business environment, and easy licensing procedures all contributed to the country’s rise in the blockchain sector. Today, Estonia is one of the most STO friendly countries in the world.

Malta

Malta continues to be a driving crypto force in the region. This country took the crypto reigns through a combination of factors. Malta was the first country in the world to provide a solid regulatory framework for crypto investors and ICOs. The government is pro-active in recruiting new startups to their market.

Today, Malta is one of the best locations in the world to launch your STO. The country already is home to numerous large crypto platforms. The worlds largest crypto exchange by volume, Binance, partnered with the Maltese Stock Exchange (MSX) in September of last year. The two plan to build a new security token exchange within the country in the coming months.

UK

The UK currently does not have crypto regulations in place. The country continues to research the cryptomarket with regulators claiming that it could be years before proper regulatory guidelines can be developed. In March 2018, the countries Crypto assets Taskforce issued a report in which cryptocurrencies were listed in three distinct classes. These classes include security tokens, utility tokens, and exchange tokens.

Currently, the UK crypto debate continues. The British Business Federation Authority (BBFA) released a report in which they detailed how bad regulations would hinder growth in the sector much more than “no regulations at all.” As it stands today, the UK has a strong blockchain community with analysts predicting future growth in this sector.

France

France took a much different approach regarding cryptocurrency firms. The Authorité des Marchés Financiers (AMF) released ICO guidelines last year. The new regulations require all ICOs to provide full transparency regarding their offerings. Companies must define their tokens use prior to approval. This demand is required so that officials can determine what type of token the company plans to issue.

France’s stance on ICOs is mimicked by a plethora of other countries around the globe. By making all ICOs operate in full disclosure, the country managed to simultaneously welcome STOs while reducing the number of ICOs in operation. STOs provide a much safer way for investors to participate in blockchain fundraising raising campaigns.

EU Security Tokens are On the Rise

Now that you have a better understanding of the cryptocurrency regulations currently under development in Europe, it’s easy to see why countries like Malta have invested so much into their blockchain sector.

As the global economy continues along the path of digitization, there is much to be gained for the country able to become the epicenter of this technological revolution. Hopefully, more countries around the globe will realize the importance of these developments and how they affect the future of global economics in major ways. For now, the race is on to see which European country is able to take the lead in the blockchain economy.

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David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com

Regulation

Supreme Court Reins in SEC on Disgorgement

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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.

Disgorgement

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.

Commentary

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).”

Recent Examples

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.

After Months of Silence by ICOBox, the SEC Seeks ‘Default Judgement’ and ‘Permanent Enjoinment’

SEC Levies Various Charges against ‘Teshuater’

Veritaseum Hit with $8 Million in SEC Fines

SEC

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?

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Regulation

SEC Chairman Jay Clayton Moving On?

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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.

Burnt Bridges?

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.

It’s Complex

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.

CFTC

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.

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Exchanges

OSC Finds Extensive Evidence of Fraud/Theft by Gerald Cotten and QuadrigaCX

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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.

The Good

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.”

The Bad

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.

Financial Breakdown

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.”

OSC

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.

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