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Regulation

A Look at The Cryptocurrency Act 2020

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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

KYC/AML – Who is Proactive? Who is Under Fire?

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KYC/AML

AML (anti-money laundering) refers to the laws, regulations, and policies that are used by financial-based institutions to monitor and screen customers’ source of funds, and to ensure that the funds are obtained legally; AML acts as a deterrent for criminals wishing to hide and move illegal money.

A subset under the larger AML umbrella is KYC (know-your-client/customer).  KYC is the collection of data by financial institutions to know its customers better and establish a customer profile that details a customer’s risk tolerance, financial position, and financial literacy.  Documents often collected in the KYC process are notarized passports and utility bills, employment status, net worth, source and description of funds, etc.  KYC is used to protect the financial institution and the customer.

While KYC/AML plays an important role in investing, not all financial institutions are equally thorough in the collection of KYC/AML data.  There have been multiple companies in the digital asset industry that have come under fire for lax approaches to the KYC /AML verification process.  By contrast, there are also multiple instances of companies in the digital asset industry that have taken proactive approaches.

Why are KYC and AML practices important?

While it would be nice to live in a world absent of bad actors, this is simply not reality.  KYC/AML plays a role in creating safe and fair financial markets for everyone.  They also provide a means of recourse against those found to be acting in bad faith.

There are drawbacks in trying to foster fair markets though – notably, a loss of privacy.  Yes, honest investors may gain better safety, but they are also forced to give up vital identifying information about themselves.  This is a valid concern; when giving up personal data, you are entrusting that it will be safely guarded by the receiving entity.  Unfortunately, financial institutions are not immune to data breaches as recently made evident by the Canada Revenue Agency which had a breach of more than 48,500 accounts.

Lax Data-Gathering

Despite the noted benefits of KYC/AML, there are many companies that have opted for a half-hearted approach to these practices.  The following are only two recent examples in a pool of many which highlight this.

Binance Sued

One of the largest cryptocurrency exchanges in the world, one would assume that Binance would partake in good KYC/AML practices. This, however, is not the case in the eyes of Japanese exchange, Zaif.  This lesser-known exchange is now suing Binance over its ‘lax’ KYC/AML practices.  The lawsuit stems around a hack of Zaif in 2018, which resulted in roughly $60M of stolen assets being laundered through Binance – an occurrence that Zaif believes would not have occurred if the KYC/AML procedures used were up to par.

ePayments Shut Down by FINRA

In this instance, payment processor, ePayments, went under a FINRA imposed lockdown in early 2020. While the company has remained quite tight-lipped regarding the reasoning for this, it is known that the lockdown stems from a lax approach to KYC/AML.  In recent days, ePayments has provided a small update, indicating that it is commencing a platform restart soon – albeit with the discontinuation of support for cryptocurrencies – after months of overhauling its KYC/AML approach.

Learning by Example

Although there are those that have not placed enough emphasis on KYC/AML, others have watched and learned from these transgressions.  The following are examples of this, showing both service development, and adoption.

BnkToTheFuture Invests in/Adopts Blockpass

This recent announcement is more than just an investment. BnkToTheFuture will be incorporating a tailor built solution by Blockpass, meant to facilitate comprehensive and efficient KYC/AML procedures.

Securitize makes KYC easy

Industry leading, Securitize, recently launched a new service, dubbed ‘Securitize ID’. This service was built to bring new efficiency to KYC/AML procedures.  It essentially allows for an investor to be ‘whitelisted’ after completing KYC/AML processes through Securitize.  Being whitelisted involves assigning a unique investor ID, which is then recognized by co-operating companies – meaning the process does not need to be repeated countless times.

A Growing Industry

If anything can be derived from these various examples, it is that the world of blockchain needs to take KYC/AML seriously.  While there may not have been services to fit these needs at one point in time, this is no longer the case.  Moving forward, expect to see increased adoption of these services tailor-built for KYC/AML, as companies look to avoid the wrath of regulators, and ensure fair markets for clientele.

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Regulation

Nigerian SEC Provides Clarification on Token Offerings and Digital Asset Classification

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Investors continue to flock towards assets such as cryptocurrencies and digital securities as, not only a new form of currency but a hedge against global economic uncertainty.  As a result, regulatory bodies around the world have had to adapt or clarify approaches towards these alternative asset classes.  The latest to do so is the Nigerian Securities and Exchange Commission.

Before jumping into what a few of these approaches are, the Nigerian SEC took the time to allay fears of an unnecessarily strict approach.

“Digital assets offerings provide alternative investment opportunities for the investing public; it is therefore essential to ensure that these offerings operate in a manner that is consistent with investor protection, the interest of the public, market integrity and transparency. The general objective of regulation is not to hinder technology or stifle innovation, but to create standards that encourage ethical practices that ultimately make for a fair and efficient market.”

Default Classification

In this recent address to the public, the Nigerian SEC was explicit in its approach towards digital assets, stating,

“The position of the Commission is that virtual crypto assets are securities, unless proven otherwise.”

By taking this stance, it removes the guesswork surrounding the treatment of digital assets.  Essentially, it does not matter if an asset fails to fit the definition of a security.  In order to be deemed something else, this needs to be proven to the Nigerian SEC on a case-by-case basis.  Only then, with the approval of the regulatory body, can an asset be reclassified.

Where the Onus Lies

In addition to establishing its position that all digital assets are to be treated as securities by default, the Nigerian SEC elaborated on where the onus lay for those looking to change the classification of an asset.

“…the burden of proving that the crypto assets proposed to be offered are not securities and therefore not under the jurisdiction of the SEC, is placed on the issuer or sponsor of the said assets.”

Essentially, the Nigerian SEC will not be taking it upon itself to classify every asset.  It is the responsibility of a tokens issuer to prove the most appropriate classification.

All Token Offerings Regulated

While the first two points of clarification maintain a focus on investors, a third was made to provide clarity to companies hosting capital generation events.

These events, which include ICOs, DSOs, and IEOs, are all subject to regulation by the Nigerian SEC.  There are no forms or variations that ‘skirt’ around existing regulations.  As all digital assets are deemed securities by default, this classification spills over into events meant to facilitate their sale/distribution.  It is stated,

“…all Digital Assets Token Offering (DATOs), Initial Coin Offerings (ICOs), Security Token ICOs and other Blockchain-based offers of digital assets within Nigeria or by Nigerian issuers or sponsors or foreign issuers targeting Nigerian investors, shall be subject to the regulation of the Commission”

In the ICO boom of 2017, companies around the world took part in these popular means of raising capital.  While many were scams, there were still many well-intentioned companies that simply were not well informed.  As a result, many hosted ICOs, under the impression that securities laws would not apply when this was simply not the case.

This stance by the Nigerian SEC was made in an effort to avoid this confusion moving forward.  While ICOs may not be as popular as they once were, token offerings still regularly occur in the form of DSOs and IEOs.

SEC Nigeria

The Nigerian SEC in its current form was founded in 1979.  Much like similar regulatory bodies, it is tasked with ensuring fair and transparent capital markets through the creation and enforcement of regulations.

Chairman, Olufemi Lijadu, along with a 9 person board, currently oversees operations.

In Other News

At the beginning of today’s look at the actions of the Nigerian SEC, we alluded to similar occurrences in a variety of nations.  Some of these occurrences involved real change, while others simply clarification.  The following are a few examples of these.

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Regulation

FLiK and CoinSpark Orchestrators Charged by SEC for Fraudulent ICOs

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FLiK CoinSpark

On September 11, the SEC announced charges against FliK and CoinSpark, as well as five individuals associated with the two companies.  The charges stem from two fraudulent ICOs (FliK and CoinSpark) held in 2017.

With 2020 being a disaster in many ways, it is easy to develop a short term memory of past years.  Unfortunately for the bad actors that took part in past fraudulent ICOs, the Securities and Exchange Commission (SEC) remembers.

SEC Charges

The charges surrounding these two ICOs are various.  Not only did the events represent the illegal sale and distribution of securities, but they were rife with other fraudulent activity.

  • Illegal sale and distribution of unregistered securities
  • Misrepresentation
  • Appropriating and misusing investor funds
  • Market manipulation

As a result of these charges, all parties have opted for a settlement with the SEC – each of which consists of restrictions on future market participation, along with fines that range from $25,000 – $75,000 USD.

Naming Names

The aforementioned charges are particularly noteworthy, due to the names attached to these projects.  Of the 5 individuals charged, two are well-known celebrities.

Clifford ‘T.I.’ Harris – T.I. is a rapper/actor that not only promoted, and sold FLiK tokens, but also misrepresented himself as a co-owner of the project.

Ryan Felton – Primarily a film producer, Ryan Felton was the main orchestrator behind both illegal securities offerings. The SEC took the time to comment specifically on his actions, stating, “The federal securities laws provide the same protections to investors in digital asset securities as they do to investors in more traditional forms of securities…as alleged in the SEC’s complaint, Felton victimized investors through material misrepresentations, misappropriation of their funds, and manipulative trading.”

Off the Hook?

If there is one individual that may yet rest easy, and be happy with the conclusion of this saga, it would be Kevin Hart.

When the SEC first began investigating the actions of those affiliated with FLIK, Kevin Hart was among those named.  Fortunately for the superstar actor/comedian, recent developments indicate that there have been difficulties proving his involvement.

For the time being, there was no mention of Kevin Hart in the SEC’s most recent communication.

Securities and Exchange Commission (SEC)

Founded in 1934, the SEC is a United States regulatory body.  Its purpose is to foster fair and transparent markets, through the creation and enforcement of regulations pertaining to assets deemed securities.

Chairman, Jay Clayton, currently oversees operations at the SEC.

In Other News

When looking at some of the other high-profile cases to be settled with the SEC, news of FLiK and CoinSpark seems relatively minor.  Despite this, when looking at the big picture it becomes clear that no ICOs are safe from enforcement actions by the SEC.  These smaller cases discussed today are simply the latest in a long line of similar instances.

By not letting anyone ‘off the hook’, the SEC is sending a clear message moving forward that the blockchain industry needs to remain mindful of existing securities regulations, and that companies will be held accountable for their actions.

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