In the past few days, there have been multiple developments pertaining to the anticipated Libra token – a to-be-released stablecoin by Facebook subsidiary, Calibra.
These developments surround, not only the actions of Calibra themselves, but how the token will be received in a variety of nations.
As suspected by many, not everyone intends to welcome the stablecoin with open arms.
Although not surprising, it was recently confirmed that Calibra has, indeed, filed within Switzerland for the appropriate licensing, to be designated a payment system.
This filing prompted FINMA to release statements confirming the filing, and how exactly they view the project with regards to regulations through a new ‘stablecoin guideline’
This guideline, which builds upon similar ones previously released, which pertain to ICOs, can be found HERE.
French Fury and Scrutiny by the Swiss
The aforementioned filing by Calibra has prompted, not only statements from regulatory bodies, but from high profile individuals as well. Here are a few of those statements touching on the project.
The Swiss Financial Market Supervisory Authority (FINMA), stated,
“The highest international anti-money laundering standards would need to be ensured throughout the entire ecosystem of the project… For bank-like risks, for example, bank-like regulatory requirements would apply.”
The French Economy and Finance Minister, Bruno Le maire, was particularly blunt in his current views on the project. Speaking at a recent conference, discussing cryptocurrencies, he stated,
“I want to be absolutely clear: In these conditions, we cannot authorise the development of Libra on European soil.”
Calibra has not sat idly by as authorities scrutinize their project. Representatives have been quick to defend their efforts, and placate the public at large with assurances of their dedication.
A statement made by David Marcus, Head of Calibra, in front of the U.S. Senate in July sums up their stance well. He stated,
“The time between now and launch is designed to be an open process and subject to regulatory oversight and review…We know we need to take the time to get this right. And I want to be clear: Facebook will not offer the Libra digital currency until we have fully addressed regulatory concerns and received appropriate approvals.”
Acting as a subsidiary of Facebook, Calibra was launched in 2019. This young company was created with the goal of establishing a new digital wallet meant to connect the world through the use of the Libra stablecoin.
We previously took a closer look at the stablecoin discussed here today, and along with the Libra Investment Token, which is to launch alongside it. To gain a better understanding each coin/token, and how they differ, make sure to peruse the following article.
In Other news
Due to its potential to disrupt various areas of finance, and the far reach of Facebook, it should come as no surprise that we have detailed events pertaining to Calibra on multiple occasions. The following articles discuss hurdles being faced by the project, along with views being taken by the Senate.
Traditional Banks Ramp Up Custodial Services for Digital Assets
In recent weeks, we have seen an increase in the adoption of blockchain services, among traditional banks. First, U.S. based banks were given the green light to custody cryptocurrencies by the Office of the Comptroller of the Currency (OCC). Now, we learn that one of the largest banks in South Korea, KB Kookmin Bank, is already working to develop similar services.
With regard to South Korea, the plan is for KB Kookmin Bank to begin offering custodial services for digital assets. This is a group effort involving the following companies,
This collaboration is particularly noteworthy, as KB Kookmin Bank is not just any old bank. They are currently the largest bank in South Korea. Moves made by a bank of this stature are followed closely by many. Although KB Kookmin Bank and its partners may be first to the table, expect to see others take a seat in the near future.
Future Asset Expansion
While initial services will centre on the custody of cryptocurrencies, it is believed that this support will eventually grow, encompassing various types of digital assets. More specifically, it is expected that in time, these custodial services will support digital securities.
In commentary released by Hashed, this expansion of supported assets was touched upon. Hashed states that through this collaboration, participants anticipate, “…that the digital asset industry will not only involve cryptocurrencies, but also other traditional assets such as real estate, artwork, and other reified rights that will be issued and traded on blockchain platforms.”
Although cryptocurrencies stand to benefit first, the development of such custodial services has the potential to transform and usher forth new growth among the digital securities sector.
Office of the Comptroller of the Currency
In the weeks preceding the news surrounding KB Kookmin Bank and its forthcoming custodial service, we saw the OCC release of an interpretive letter on the subject.
In this letter, the OCC breaks down, not only what digital assets are, but how banks can support the growing use. The OCC summarized its stance, stating,
“The OCC recognizes that, as the financial markets become increasingly technological, there will likely be increasing need for banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers. By providing such services, banks can continue to fulfill the financial intermediation function they have historically played in providing payment, loan and deposit services.”
“…we conclude a national bank may provide these cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency. This letter also reaffirms the OCC’s position that national banks may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.”
Which came first, the chicken? Or the egg? This old saying could easily be applied to the current world of blockchain. Are these traditional banks jumping on board the train due to the recent resurgence being seen in the sector? Or is the sector surging due to banks jumping on board. Regardless of the answer, signs of blockchain adoption within traditional industries is a definite positive.
Hopefully, this swing in sentiment among banks continues to gain momentum, as banks have not always viewed digital assets in a positive light. Only months ago, we were reporting on difficulties being faced by German companies, as they were refused services by traditional banks.
KB Kookmin Bank
Founded in 2000, KB Kookmin Bank maintains operations in Seoul, South Korea. Since launch, KB Kookmin Bank has grown to employ over 25,000, while providing customers on a global scale with access to commercial banking services.
CEO, Hur Yin, currently oversees company operations.
Office of the Comptroller of the Currency (OCC)
The OCC is a U.S. based regulatory body, tasked with supervising national banks. This supervision is undertaken with the goal of ensuring fair and transparent financial services to all customers.
Acting Comptroller, Brian P. Brooks, currently oversees operations at the OCC.
Commissioner Hester Peirce Awarded 2nd Term at SEC
From now until 2025, the world of blockchain can look forward to at least one friendly face residing at the Securities and Exchange Commission. Earlier this week, Commissioner Hester Peirce was successfully voted into a subsequent term at the regulatory body.
The vote, which took place on August 6th, 2020, was completed by the U.S. Senate. While no outcome is ever assured, this decision had been anticipated for months now, as the initial nomination was put forth six months prior, on February 6th.
A History of Dissent
While there are a variety of reasons that the blockchain and cryptocurrency community have become enamored with Commissioner Peirce – earning her the moniker of ‘Crypto Mom’ – the most obvious is her previous statements of dissent.
A statement of dissent simply refers to the expression of a belief, contrary to those of others, and their actions made. In the past few years, Commissioner Peirce has voiced her dissent on multiple occasions.
Winklevoss Bitcoin Trust, 2018
The first statement of dissent, issued by Commissioner Peirce, revolved around the denial of a Bitcoin based exchange traded fund (ETF) application in 2018. While the main mandate of the SEC is to protect investors, Commissioner Peirce felt their actions did just the opposite. She stated, “…I am concerned that the Commission’s approach undermines investor protection by precluding greater institutionalization of the bitcoin market. More institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order.”
Exchange Traded Funds (ETF), 2020
In early 2020, Commissioner Peirce reiterated her opposing stance regarding cryptocurrencies and ETF type products. In the time between her initial statement on the Winklevoss fund in 2018 and now, the SEC had gone on to deny various applications – essentially doubling down on their stance. She stated, “…I warned that the Commission’s hesitancy to embrace new products and technologies impedes innovation in this country and threatens to drive entrepreneurs, and the opportunities they create, to other jurisdictions. The Commission’s actions in this area over the past eighteen months confirm these concerns. Meanwhile, investor interest in gaining exposure to bitcoin continues to grow.”
This example is the most recent of the three. Taking place in July of 2020, during a speech at Blockchain Week Singapore, Commissioner Peirce touched on why she thought the SEC’s actions against Telegram were flawed. While her stance was not divulged in an official statement of dissent, it was clear nonetheless. She stated, “Telegram chose to end its legal battle by settling with us. I did not support the settlement because I did not support the underlying action. I do not support the message that distributing tokens inherently involves a securities transaction.”
While it may be easy to disagree with one’s peers, Commissioner Peirce has ensured that she has provided more than just criticisms. Most notable is Commissioner Peirce’s ‘Safe Harbor Proposal’. In the Safe Harbor proposal, companies would benefit from “a three-year grace period within which they could facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws, so long as the conditions are met.” This is an interesting and important approach; time has proven that while many blockchain based assets may begin their lives as securities, they can later transform into a different class of asset. One such example is the wildly popular, Ethereum.
Ethereum, which held an ICO early in its lifecycle, has since become a functional decentralized platform and token. This simple transition, which was always planned, allowed for Ethereum to transform from being a security to simply a token.
By implementing a proposal such as this, innovative and well-intentioned companies would have more leeway to produce next-gen products, without the fear of repercussions from the SEC (providing the companies meet all the conditions). Commissioner Peirce’s Safe Harbor Proposal can be read in detail here.
Despite the SEC retaining a familiar face in Commissioner Peirce, the regulatory body may soon look quite different.
Although talk has died down for the moment, current SEC Chairman Jay Clayton is being floated as a candidate for a position as the U.S. Attorney for Southern New York. If this departure were to occur, Commissioner Peirce would, no doubt, be an exciting prospective replacement for the position of Chairman.
Such a move would, no doubt, be accompanied by differing approaches to blockchain and crypto markets, as Commissioner Peirce has made it clear that she believes the markets are here for the long run. Time will tell if Commissioner Peirce finds herself filling these shoes.
Securities and Exchange Commission
The Securities and Exchange Commission (SEC), is a U.S. based regulatory body, tasked with ensuring fair and transparent markets. This is done through the creation, and enforcement, of various laws surrounding the usage of securities.
Chairman, Jay Clayton, currently oversees operations at the SEC.
In Other News
In early 2020, we were fortunate to have completed an exclusive interview with Commissioner Peirce, herself. In this discussion, we learned more about her approaches to crypto and blockchain, as well as that of the SEC. For those interested in learning more about Commissioner Peirce, this interview can be found in its entirety, HERE.
Commissioner Hester Peirce Dissents on SEC Telegram Ruling and Settlement
Commissioner Hester M. Peirce of the Securities and Exchange Commission (SEC) delivered a June 21 speech at Blockchain Week in Singapore where she expressed her dissent regarding the recent settlement between the SEC and Telegram.
It is unsurprising to hear Commissioner Peirce disagree with the recent court ruling barring the release of Telegram tokens to all investors, and subsequent settlement with the SEC. Commissioner Peirce has made it clear that she did not agree with the originating October 2019 emergency order filed by the SEC against Telegram.
Timeline of Telegram Raise and Court Case
|February 2018||Popular messaging app Telegram raises $850M using the SAFT (Simple Agreement for Future Tokens) structure|
|March 2018||Telegram raises an additional $850M using SAFT structure|
|October 2019||Distribution of Telegram Tokens to Investors scheduled for October 31, 2019|
|October 2019||SEC files an emergency action and temporary restraining order against Telegram to prevent the distribution of Telegram tokens to investors.|
|March 2020||The court orders that Telegram may not distribute tokens to any investor, American and foreign|
|June 2020||Telegram settles with the SEC and agrees to return $1.2Bn to investors, close operations, and pay $18.5M fine|
Synopsis of Telegram Raise
- $1.7Bn raised from investors ($424.5M from American investors)
- 171 investors (39 Americans)
- Accredited investors only
- A minimum investment of $1M per person or entity
- The invested money was to be used to develop the Telegram Open Network (TON) blockchain and grow and maintain Telegram Messenger.
What Issues Does Commissioner Peirce Raise?
The court sees “one single scheme”. Commissioner Peirce takes issue with the court treating the investment agreement between Telegram and the accredited investors, the delivery of the tokens to the investor, and the resale of the tokens, as one single scheme. She laments, “gone is the distinction between the investment contract (the agreement between Telegram and the accredited investors) and the token (the asset to be created and delivered under the agreement)”. Commissioner Peirce believes that the initial investments in the company are to raise capital to build the platform, and that those initial investments are separate from the resale of a functional token “… such tokens, once they have a consumptive use, should be able to be sold to purchasers outside of a securities transaction”. She believes the Howey test supports the idea that the resale of the tokens does not constitute as a security simply because the tokens were initially acquired as a part of a securities transaction.
What is a requirement for success, is deemed an illegal securities offering by the SEC. What the SEC sees as an illegal securities offering (widespread global distribution of the token), Commissioner Peirce sees as a necessary element for a successful blockchain. “I do not support the message that distributing tokens inherently involves a securities transaction…. I see [widespread distribution of tokens] as a necessary prerequisite for any successful blockchain network.”
The SEC is overreaching. Commissioner Peirce also takes issue with the fact that the SEC, asked and was granted, enforcement against a corporation that is not incorporated or based in the US, and only a quarter of the investors and total investment were US-based. She reminds us that the American way is not the only way in a global economy “This willingness of the SEC to ask for, and of the district court to grant, such sweeping injunctive relief against a non-US company, in a case where one-quarter of the funds came from US investors, reasonably might raise some concerns among our international colleagues… we would do well to recall that our way is not the only way. We should be cautious about asking for remedies that effectively impose our rules beyond our borders.”
At Your Own Risk – No Clear Path
Interestingly, Commissioner Peirce notes that Telegram employed sophisticated counsel, “made good faith efforts to comply with federal securities laws” and “engaged extensively with SEC staff”. It begs the question – what went wrong? Did the SEC give improper guidance? Did Telegram choose not to follow the SEC’s guidance? Did the SEC change its mind once Telegram was due to distribute tokens to investors? These questions do not have clear answers and continue to leave companies in risky and unknown waters when conducting token offerings in the United States and/or with American investors.
It is clear that Commissioner Peirce believes that the SEC is not doing enough to help guide companies in the right direction, she notes “rather than provide useful guidance on safety standards and functional braking technology… [leaving] the industry to guess at the path to compliance”. Companies should not have to assume the risk of guessing at the correct path to compliance.
Who Did the SEC Protect?
The case of SEC v Telegram Group Inc. and Ton Issuer Inc. was petitioned by three investors; seven investors are listed as interested parties. All the investors would have had to qualify as “accredited investors” under the federal definition to invest in the Telegram raise. The minimum threshold for investing in Telegram was USD$1,000,000.
At the end of her speech, Commissioner Peirce asks, “who did we protect by bringing this action?”. It is a good question – one would assume that an investor with the capital to invest $1M in the Telegram raise is a reasonably sophisticated person or entity that understands the inherent risks of investing in new technology and early stage start-ups. So, who did the SEC really protect in this case? It appears that the only people protected were a handful of sophisticated investors who were unhappy with the risk they knowingly took.
Since 2018 the crypto industry has witnessed a growing trend of companies refusing to accept American investors. It is likely that this trend of barring American investors will continue until there is clear guidance from the SEC. Due to the SEC’s enforcement actions and lack of guidance, most companies simply deem it too risky to allow American citizens, residents, or entities to invest in capital (token) raises.
In February of this year, Commissioner Peirce announced her proposal to bridge the gap between regulation and decentralization. She calls this proposal a safe harbor that gives companies a three-year grace period to develop a functional network. At the end of the three years, the tokens would not be deemed securities providing there is a functioning network where the token can actively be used for goods and services. Additional details about Commissioner Peirce’s safe harbor proposal can be found in the link above.
While Commissioner Peirce’s safe harbor proposal is well thought out and appears to be a great way to move forward, unfortunately, it is still simply a proposal. Given the ongoing refusal of the SEC to provide clear written guidance, rules, or regulation, we do not expect that Commissioner Peirce’s safe harbor will be adopted any time soon by the SEC. We expect to see other global markets take the lead in decentralized projects if clear guidance or regulations are not set out by the SEC.
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