Regulation
After Months of Silence by ICOBox, the SEC Seeks ‘Default Judgement’ and ‘Permanent Enjoinment’
No Response
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.
Default Judgement
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.
Permanent Enjoinment
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.
Past Actions
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.
SEC Zeroes in on ICOBox Activity, Filing Multiple Charges
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
ICOBox
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.
Ripple XRP Under Increased Scrutiny as a Security
Telegram Wins Court Battle but Abandons ‘TON’ Blockchain
Accelerating
To date, various nations have not only noted the potential need for a CBDC in the future, but have actually embarked on pilot programs to develop them. The most recent nation to accelerate this process, delving in to a pilot program, is South Korea.
In this recent announcement by The Bank of Korea (also the nation’s central bank), they begin by stating, ‘The need for the introduction of the central bank digital currency (CBDC) by the Bank of Korea will increase.’ It is this recognition that has clearly prompted them to look at the logistics surrounding the creation, dispersion, and usage of such a CBDC.
What Will it Look Like?
While the BOK states that they are looking into the feasibility of utilizing blockchain to underpin a CBDC, usage of this technology is not a given.
Furthermore, the pilot program is expected to look at more than simply the technical requirements behind such a feat. This extended look includes possible legal hurdles, expected cooperation between other central banks, custody solutions, and more.
The pilot program is said to be structured as a 22 month process, with the following breakdown.
- Defining CBDC design and functionality
- 5 months
- Technological requirements
- 5 months
- Business process analysis through external consultation
- 4 months
- CBDC construction and testing in controlled environment
- 12 months
The BOK, notably, refers to Sweden and their CBDC, the e-Krona, with regards to the structuring of their pilot program.
CBDC
The acronym ‘CBDC’, refers to a ‘Central Bank Digital Currency’. These currencies are digital representations of previously established FIAT – meaning government issued currency.
While their structuring may vary, most believe that CBDCs will be structured as blockchain based tokens; Primarily due to the technologies ability to encode fungibility, while providing easy and cost efficient value transfer.
While digital, because CBDCs are issued by government regulated entities, they would be subject to the same, or very similar, regulations and scrutiny as traditional paper currencies.
Similar Approach
If this approach being taken by The Bank of Korea sounds familiar, perhaps that it because The Bank of Canada has recently announced similar intentions.
The Bank of Canada Could Issue a Digital Currency in the Future
While there is no firm timetable for the launch of a potential digital dollar, development is in the works. As the adage goes, ‘an ounce of prevention is worth a pound of cure’. Clearly, this is a stance adopted by each of these central banks, as they look to be prepared for the eventual need of a CBDC. When the time comes, and a cure is needed for ailing paper currencies, preventative measures will be ready on the sidelines.
The Bank of Korea (BOK)
The Bank of Korea acts as the central bank for South Korea. Operations are situated in the capital, Seoul.
In operation since 1950, The Bank of Korea is currently spearheaded by Governor, Lee Ju-yeol
In Other News
Recently, we took a brief look at a few ways that COVID-19 is affecting blockchain based endeavours, to date. One of these revolves around issues which plague paper currency, and the need to go digital. Make sure to read the following article to learn more about the perks brought forth by CBDCs.
Japanese regulators officially launched their STO market via amendments to the country’s current securities regulations this week. The new crypto exchange-specific amendments add clarity to the market and introduce a number of important customer protections. As such, analysts predict that the Japanese crypto sector is about to experience rapid expansion.
According to new reports, the amendments will go into effect on May 1. Importantly the changes directly alter the Payment Services Act and the Financial Instruments and Exchange Act. The amendments introduced a variety of new measures ranging from new banking regulations and cold wallet requirements, all the way to, new legal terminology.
Storage Upgrades – STO Regulations
Specifically, the new amendments put new requirements on exchanges. For one, all exchanges must now keep in cold storage an amount equal or greater than the number of users’ funds held online. This regulation ensures that exchanges rely on cold storage whenever possible. Along the same line of thought, exchanges are no longer allowed to keep users’ funds and their funds together. Importantly, this regulation extends across both crypto and fiat reserves.
Financial Services Act via Wikipedia – STO Regulations
ICO and STO Amendments
Another important amendment added to the regulations is the legal definitions of initial coin offerings (ICOs) and security token offerings (STOs). For years, blockchain firms struggled to get regulators to clarify the exact differences in terms of regulations. Now, regulators have a clear cut understanding of what type of fundraising campaign is underway, and how to classify it.
Fighting Fake News – STO Regulations
Interestingly, the new amendments go after all forms of market manipulation. There are now stricter fines and punishments in place for spreading rumors or making false statements. This is an important addition as market manipulation is a real concern internationally. Japanese officials hope they can curb these nefarious actors and weed out bad sources of information.
As part of the new enforcement policies, the new regulations place cryptocurrency asset derivatives transactions under the FSA’s jurisdiction. Additionally, there are some terminology changes. Moving forward, cryptoassets and not “cryptocurrencies” is the terminology regulators agreed on.
Importantly, a group of Japan’s top securities firms has been patiently waiting for these regulations to become official. The group includes Monex Group, Rakuten, and one of the largest financial institutions in the country, SBI. In March, the group publicly revealed plans to create a regulated security token exchange.
COVID-19 Delays
The group’s wish could have come sooner if the world wasn’t in the middle of the COVID-19 pandemic. Unfortunately, the virus has wreaked havoc on the markets and caused multiple delays for regulators. Notably, Japan was even forced to postpone the 2020 Olympics.
Japan STO Market is Here
Despite the dreary state of the international markets, Japan seeks to be the blockchain capital of the region. This determination, coupled with regulators forward-looking stance, is sure to give the country an advantage over the competition. For now, you can expect to see progress as the Japanese STO market is officially active.
This week, news broke that an amended complaint against Ripple has been filed by XRP investors. This news is the latest development in a two-year class-action lawsuit brought against the firm. Interestingly, investors chose to amend this lawsuit in order to add protections in the case that XRP doesn’t fall under securities regulations.
Importantly, the amended suit includes former XRP investor Bradley Sostack as the lead plaintiff. In this go-around, the plaintiffs brought additional claims against Ripple and its CEO, Brad Garlinghouse for violation of California business law. The report alleges the company blurred the differences between its enterprise solutions and XRP to further drive demand in the market.
Hedge Your Bets
Originally, the lawsuit alleged that Ripple raised millions of dollars through the unregistered sales of XRP to US retail investors. Now, according to a court document filed on March 25, investors decided to attempt another approach. Perhaps, fearing that XRP could escape securities regulations, the new suit goes after the firm for violations of California business laws.
To this extent, the sixth claim for relief states that the firm participated in false advertising, while a seventh claim, further accuses the firm of unfair competition in violation of California regulations. Also, the claim states that Ripple reportedly limited the supply of XRP to drive price appreciation.
Garlinghouse Under Fire
Specifically, the allegations claim that Garlinghouse made numerous conflicting claims to investors. In multiple instances, he stated that he was holding XRP for long-term gains. However, researchers pointed out that these statements were false. Throughout 2017, Garlinghouse sold millions of XRP via cryptocurrency exchanges. In fact, a review of the XRP ledger indicates that Garlinghouse sold over 67 million XRP in 2017 alone. Additionally, on multiple occasions, he dumped his XRP within days of receiving it from Ripple.
XRP Ripple Lawsuit
SEC vs Ripple XRP
The lawsuit cites statements made from Ripple about XRP being a utility token essential for international payments. Additionally, the firm and CEO made statements in which they described the cryptocurrency sales are primarily to market makers. This last point could prove to be a major problem for Ripple as 60 percent of XRP is owned by Ripple, and until now, only saw use solely for fundraising efforts.
The Ripple XRP Saga
The XRP securities saga started when a group of disgruntled investors lodged a complaint with the SEC back in 2018. Since that time, the case has seen numerous amendments as both Ripple and the plaintiffs adjusted their strategies. Ripple hoped to get the case dismissed early on, but U.S. District Judge Phyllis Hamilton in the Northern District of California ordered in February the suit could proceed to trial.
While the news did seem bleak for Ripple, at that time, Judge Hamilton also stated that the company did not violate California state law. Consequently, both the false advertising and personal liability against Ripple’s CEO Brad Garlinghouse were dropped in that instance.
Now, Ripple worries that the plaintiffs will utilize unlimited amendments to falter the XRP market. Given the new legal approach that the plaintiffs have taken to towards the company, there may be some validity to their concerns.