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Regulation

A Look at The Cryptocurrency Act 2020

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Cryptocurrency Act of 2020 - 1

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.

Cryptocurrency

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.

Cryptocurrency Act of 2020

Cryptocurrency Act of 2020

Crypto-Commodities

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.

Crypto-Securities

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.

FinCEN

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.

SEC

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.

CFTC Crypto-Commodities

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.

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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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