This week, a group of congressmen put forth a new cryptocurrency bill labeled the Cryptocurrency Act 2020. The goal of the new legislation is to provide additional clarification on digital asset regulations. The bill has some wide-sweeping regulations that, if voted into law, could reshape the entire crypto sphere moving forward.
The Cryptocurrency Act 2020 was introduced by U.S. Representative Paul Gosar (R-AZ). The senator stated that it was his desire to attribute regulatory clarity to the market. Currently, much of the crypto space is vague in terms of regulations. Consumers and lawmakers are in a debate over what agencies are responsible for regulations of what types of cryptocurrencies.
The Types of Digital Assets – Cryptocurrency Act 2020
The new legislation begins with a categorization of cryptocurrencies into three main groups. These groups are then used to determine what agency is responsible for the creation of regulations and enforcement.
The first class described in the new bill are cryptocurrencies. Cryptos include Bitcoin, Litecoin, and any other cryptocurrencies that don’t fall under the current securities regulations. The bill classifies these tokens as any crypto that “includes representations of United States currency or synthetic derivatives resting on a blockchain or decentralized cryptographic ledger.”
The bill also states that any “synthetic derivatives determined by decentralized oracles or smart contracts” fall into this category. Interestingly, this categorization places reserve-backed digital assets such as stablecoins directly into the cryptocurrency category.
The next class of cryptocurrency described in the bill are crypto-commodities. These tokens are “economic goods or services that markets treat with no regard for who produced the goods or services.” A key aspect of these tokens is the fact that they contain some form of substantial fungibility. Fungible assets are interchangeable such as the US dollar. Basically, any two dollars are equal in value. Finally, these assets must reside on a blockchain or decentralized cryptographic ledger to fall into this classification.
The final type of coin described in the bill is crypto-securities. These tokens are any coin that fails the Howey Test. This class of crypto can include tokenized debt, equity, and derivative instruments that live on a blockchain or decentralized ledger. Security tokens are among the newest type of cryptocurrency. Thee tokens seek to bring integrated compliance into the market.
Interestingly, the bill differentiates between security tokens that include a “synthetic derivative both operated and registered with the Department of the Treasury as a money services business in compliance with the Bank Secrecy Act.” Additionally, these coins must adhere to the strict anti-money laundering, anti-terrorism, and screening requirements of the Office of Foreign Assets Control, as well as, the Financial Crimes Enforcement Network.
Federal Digital Asset Regulators – Cryptocurrency Act of 2020
Aside from an attempt to clarify the market, the Cryptocurrency Act 2020 lays out what government agencies are responsible for each class of token. If passed, these agencies will gain regulatory control over the assets in their jurisdiction. Additionally, these agencies will be responsible for informing the public on the appropriate licenses, certifications, or registrations necessary to participate in these markets.
The three regulatory bodies mentioned in the bill include the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the Financial Crimes Enforcement Network (FinCEN). These groups would gain the sole authority over their respective digital asset types.
The new strategy would place those tokens deemed as cryptocurrencies under the regulations of the Financial Crimes Enforcement Network (FinCEN). For its part, FinCEN must maintain a public record of all licenses, certifications, and registrations required to create, issue, or trade digital assets.
Additionally, FinCEN would need to collaborate with the Secretary of the Treasury to enforce AML and KYC protocols in the market. Primarily, regulators want to develop a way to trace all cryptocurrency transactions. This final task could prove to be a real choir as many cryptocurrencies have privacy enabling features which would make this task almost impossible.
The bill keeps security tokens under the watchful eye of the Securities and Exchange Commission (SEC). The SEC recently began cracking down on what they considered illegal securities offerings from the 2017 ICO craze. As of late, the SEC prosecuted multiple firms such as Paragon and most recently, the startup Blockchain of Things Inc. (BCOT). Currently, the SEC assumes jurisdiction over any tokens that fail the Howey Test.
The Commodity Futures Trading Commission would gain jurisdiction of the crypto-commodities class. The group will need to develop the framework for these tokens from the ground up if the legislation passes. Analysts believe crypto-commodities are to see substantial growth over the next few years.
The Motivation for the Legislation
Many in the cryptocommunity point to the new legislation as a means to combat Facebook’s developing digital asset, Libra. Ever since Facebook announced its goals to produce a stablecoin that will operate on its network, lawmakers have been in a rush to configure some form of framework to contain the company’s potentially game-changing product.
In the past, multiple senators called for Libra to see categorization under securities. Earlier in the year, a group of bipartisan U.S. Senators proposed a bill that would place all stablecoins into the securities category. The bill – the Token Taxonomy Act of 2019 would firmly place Facebook’s latest crypto under the regulatory supervision of the SEC.
Cryptocurrency Act of 2020
This latest development showcases just how far cryptocurrencies have come in the last decade. Now, lawmakers are scrambling to develop some way to maintain control over these decentralized currencies. In the end, you may find that the technology operates in a manner that makes enforcement of these regulations nearly impossible. For now, the cryptocommunity watches and waits as lawmakers scramble for options.
After Months of Silence by ICOBox, the SEC Seeks ‘Default Judgement’ and ‘Permanent Enjoinment’
Beginning roughly 4 months ago, the SEC set their sights on ICOBox, and actions taken by the company and its founder throughout 2017. The SEC states,
“ICOBox, an incubator for digital asset startups, was founded in mid-2017 by Evdokimov, its CEO and “vision director”. To raise funds, defendants sold approximately $14.6 million worth of securities in the form of digital assets called “ICOS” tokens. Between August 9, 2017 and September 15, 2017, defendants sold ICOS tokens to over 2,000 investors, in the United States and globally…By not registering the offering with the SEC, defendants violated the securities laws’ registration requirements”
Unfortunately, despite being made aware of the various charges laid against them, the SEC and Courts have been met with nothing but silence.
The aforementioned lack of response has led to the recent developments, to be discussed here today. By failing to respond to the SEC’s filing, in September of 2019, ICOBox and its Founder, Nikolay Evdokimov, have essentially forced their hand.
Backed into a corner by the silence demonstrated by ICOBox, the SEC has filed for a ‘default judgment’ on their accusations of alleged securities violations. Simply put, a ‘default judgement’ refers to a ruling put forth by a Judge, when presented with a case where the defendants remain absent from the proceedings without valid reasoning.
While there existed the possibility of defending their actions, should a default judgement be awarded, ICOBox essentially forfeits this right.
While a default judgement is being sought, the SEC has not stopped there. In their recent filing to the courts, the SEC attempts to build a case, which demonstrates the intimate nature between ICOBox and its founder, Nikolay Evdokimov.
The SEC hopes to show that Evdokimov was, not only the face of the company both internally and externally, but that he had a direct hand in the actions undertaken by ICOBox.
In doing so, the SEC hopes for the court to award a ‘permanent enjoinment’ of, both, the company and its founder. A ‘permanent enjoinment’ refers to a court enforced prohibition of certain activities imposed upon specific entities – in this case, ICOBox and Evdokimov.
When this saga first began, in September of 2019, we reported on the initial steps taken by the SEC. The allegations raised by the regulatory body, at that time, are only now coming to an end, as they look to close out the case and move on.
Requests of the Court
In their filing, the SEC elaborates on the various infractions committed by the company and its founder. They proceed to list various suggested/requested actions to be taken by the court against the defendants. The following are a few examples of their requests.
- ICOBox and Evdokimov should be permanently enjoined
- The Court should order joint and several disgorgement with prejudgment interest
- The Court should order second tier penalties against Evdokimov
- Default Judgement Should be Entered Without Delay
Launched in 2017, ICOBox was a service provider for companies looking to host token based capital generation events, such as ICOs and STOs. Since their inception, ICOBox has helped its clients raise over $650M, in addition to raising over $14M in funds through their very own ICO.
Company operations were overseen by Founder, and CEO, Nikolay Evdokimov.
In Other News
While every case surrounding illegal activity brought forth by the SEC is an important one, there are two, in particular, that have found themselves creating headlines in recent months. These would be the situations developing around, both, Ripple and Telegram. Each of these companies have been accused of actions violating existing securities laws. On various occasions we have covered these events as they develop. To learn more about these on-going cases, make sure to peruse the following articles.
Qatar Bans All Cryptocurrency in QFC
In a surprising turn of events, The Qatar Financial Centre (QFC) announced that it would ban all cryptocurrency-related activities within the sector. The news comes as a shock as Qatar has was seen as a leader in terms of blockchain adoption in the region. Now, government officials are voicing concerns over money laundering and terrorist financing as a means to stifle local crypto activities.
News of the crypto ban came via a report by the Qatar Financial Centre Regulatory Authority (QFCRA). In the now-infamous report, the QFCRA stated that all services involving cryptocurrencies are now illegal within the exclusive economic zone. Specifically listed in the report are critical components to the market. These components include crypto to crypto trades and crypto to fiat exchanges. Also, the report directly lists virtual asset services including those that facilitate the trading, custody, and issuance of virtual assets in any form or manner.
Security Tokens Safe
Interestingly, the report doesn’t ban security tokens. In fact, these unique financial instruments remain unaffected by the new legislation. The report states that financial instruments regulated by the QFCRA, the Qatar Central Bank, or the Qatar Financial Markets Authority are exempt from the ban. This makes sense from Qatar’s standpoint because these tokens undergo full AML and KYC verification.
Discussing the decision, Sheikh Abdulla bin Saoud Al-Thani, the governor of Qatar’s Central Bank pointed to a few key points as to why the regulations make sense. He stated that a correlated effort needed to be put forth to combat money laundering and terrorist financing. He believes that only a stricter and effective regulatory and legislative framework can accomplish this task.
It appears as if this latest maneuver is actually just a part of Qatar’s overall new approach towards combating money laundering. Recently, the country instituted wide-sweeping AML legislation. All of these laws seek to curb those attempting to hide money from the government.
The Qatar Financial Centre – QFC
The QFC is a special jurisdiction within the country designed to spur economic growth. Companies that call the QFC home get access to a host of exclusive benefits. These benefits include reduced legal, business, tax, and regulatory infrastructure. In this way, Qatar seeks to attract businesses and facilitate economic development moving forward.
Tighter Regulations Globally
Qatar’s decision to add more regulations to the crypto sector mirrors that of numerous other countries. Just recently, US lawmakers proposed new legislation to bring much of the crypto market under the jurisdiction of regulators. If the new bills receive approval, there would be wide-sweeping implications for the industry.
Additionally, EU Lawmakers have come up with new legislation as well. On January 10th, 2020, the European Union (EU) will initiate the Fifth Anti-Money Laundering Directive (5AMLD). This new law requires that all digital asset platforms and even wallet providers verify and record customer identities.
Qatar Steps Backwards
As Qatar attempts to gain more control over the use and trading of digital assets within its border, it may find that these new regulations have an adverse effect. Cryptocurrencies, many of which are designed to function anonymously, are not so easily regulated and monitored. For now, Qatar will see exactly what it takes to police the digital realm as they start the enforcement of their new crypto legislation.
Ripple XRP Under Increased Scrutiny as a Security
Troubles for the Popular cryptocurrency XRP and its foundation Ripple continue to mount up. Recently, new evidence emerged which could place the group under increased scrutiny. A document, now making it’s away around the internet appears to show that Ripple, the company behind XRP, used the token to increase its wealth. Now, regulators want to take another look at the XRP project to determine if it is in fact, a security.
On Aug. 5, 2019, a group of investors filed a complaint against Ripple with the SEC. The report claims to provide concise evidence that Ripple used the XRP token to garnish huge profits. The report claims that the company currently is engaged in selling these tokens in excess of the need for profit.
Ripple XRP Securities?
If these allegations are found to be true, Ripple could see prosecution. Officials may want to prosecute under the sales of unregistered securities via the U.S. Securities and Exchange Commission’s laws. Specifically, the report claims that Ripple violated numerous securities laws in the state of California. The data put forth in the suit suggests that the company utilized the XRP brand to enrich themselves significantly.
The lawsuit points to a blurring of the lines between Ripple’s enterprise solutions and XRP. Notably, the report revealed that the firm holds the majority of the total supply of XRP. The company utilized its stake as a form of profit generation in a couple of key ways. For one, Ripple actively limited the supply of XRP to increase demand. Additionally, Ripple paid exchanges to list XRP with the intent of increasing its value
Ripple Holds the Majority of XRP
To grasp just how this strategy unfolded, you need to understand that Ripple is the largest holder of XRP. Notably, the firm will be for the foreseeable future. Consequently, just a one-cent increase in the price of XRP equals around $600 million in profit gained for the company.
Discussing these concerns, William Hinman, Director of the Division of Corporation Finance of the SEC made his case for the labeling of XRP as a security. He explained that whenever you have a third party that drives the expectation of a return, you are usually dealing with a security. These firms use the token to increase the value of the enterprise.
Hinman stated that the firm raised funds “in excess of what may be needed to establish a functional network.” For its part, Ripple stated that these funds went towards enhancing the functionality of the token’s ecosystem.
To put those gains into perspective, you don’t need to look any further than Co-founder Jed McCaleb. While McCaleb is no longer with the firm, he sells half a million XRP on a daily basis according to Bloomberg. Notably, other company officials engaged in this type of activity as well. However, in a recent interview, Ripple CEO, Brad Garlinghouse, adamantly denied that Ripple has any control over the price of XRP. He pointed to the losses incurred over 2019 as proof. Last year, Ripple slumped nearly 60 -percent from $0.51 to around $0.20.
XRP – What Tomorrow Holds
As one of the most popular platforms in the crypto space, XRP continues to see growing adoption. If the SEC were to label XRP a security it could have serious ramifications for those involved in the project. For now, investors continue to wait and see how the SEC’s strategy plays out.
- New Shore Invest Starts a New Ship Finance Platform
- iSTOX Builds Upon Recent Successes with a Further $5M in Funding
- US Global Securities to Act as ‘Lead Financial Advisor’ for $50M Raise by Custodial Platform, Koine.
- Visa Token Service Launches this Month
- Securitize Enables Investors to Allocate their Retirement Savings via AltoIRA.