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Regulation

Canadian Securities Administrators (CSA) Address Crypto-Assets within Regulatory Framework

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Canadian Securities Administrators (CSA) Address Crypto-Assets within Regulatory Framework

Notice 21-327

The Canadian Securities Administrators (CSA) have recently issued Notice 21-327 – ‘Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets’.

The title may be a mouthful, but the goal is simple – Educate trading platforms and the public, alike, on how securities regulations pertain to their activities.

For the purpose of education, it may be easier to understand the instances in which securities laws DO NOT apply, rather than the many instances in which they do.  The CSA indicates the following:

“Platforms would not generally be subject to securities legislation if each of the following apply:

  • the underlying crypto asset itself is not a security or derivative; and
  • the contract or instrument for the purchase, sale or delivery of a crypto asset
    • results in an obligation to make immediate delivery of the crypto asset, and
    • is settled by the immediate delivery of the crypto asset to the Platform’s user according to the Platform’s typical commercial practice.”

As made obvious from the above points, there really are not many instances in which exchange based activity does not fall within the purview of existing securities laws.

Whether through a misunderstanding of current regulations, or intentional disregard, many active exchanges within Canada are currently in violation of various securities based regulations.  For users of these exchanges, and the companies themselves, the CSA does their best to provide clarification on how exactly securities regulations apply to their activities.  For those worried about, or simply curious of, this application, make sure to read the notice HERE.

Stifling an Industry?

While some may view the notice as a fear tactic, looking to stifle a quickly growing industry, the CSA does their part to quell this notion.  The organization wants the public to know that they do, indeed, support technological growth, and their own adaptation to the times.

The CSA takes the time to close out their notice with the following statement,

“We welcome innovation and recognize that new fintech businesses may not fit neatly into the existing framework. The CSA Regulatory Sandbox is an initiative of the CSA to support fintech businesses seeking to offer innovative products, services and applications in Canada. It allows firms to register and/or obtain exemptive relief from securities law requirements, under a faster and more flexible process than through a standard application, in order to test their products, services and applications throughout the Canadian market, generally on a time-limited basis.

Several firms that have businesses or projects that involve crypto assets have been registered or have obtained exemptive relief from the securities law requirements”

Playing in the Sandbox

While many players in the sector may be playing by their own rules, various companies have come forth in an attempt to work with regulators.  The following list is comprised of those which have, thus far, been admitted to the aforementioned CSA Sandbox, attaining certain exemptions from existing laws.

  • ZED Network Inc.
  • TokenGX Inc.
  • Majestic Asset Management LLC
  • Rivemont Investment Inc.
  • 3iQ Crop.
  • Token Funder Inc.
  • Ross Smith Asset Management ULC
  • First Block Capital Inc.
  • Impak Finance Inc.
  • Angel List LLC, and AngelList Advisors LLC

Strategic Goal 6

The issuance of Notice 21-327 comes as no surprise.  The CSA has long been privy to the advancements being made within the world of blockchain; So much so, that the CSA specifically singled out the industry within their most recently released business plan.

Released in mid-2019, this business plan addresses various strategic goals within a 3 year time frame.  Coming in at #6 was their intent to ‘respond to technology-related emerging regulatory issues.’

Of the 4 initiatives comprising ‘Strategic Goal 6’, 3 pertain to crypto-assets and their place within securities regulations.  These 3 initiatives are as follows:

  • Propose a regulatory regime for crypto-asset trading platforms
  • Consider custodial requirements in relation to crypto-assets
  • Consider the capital raising and issues that may be unique to aspects of blockchain based securities

The CSA summarizes the rationality behind this increased focus on blockchain and DLT technologies by stating,

“DLT has the potential to transform the landscape of the financial industry. Crypto-assets are probably the most well-known and widespread application of blockchain. The CSA will consider possible changes to adapt the current regulatory framework to address the unique challenges brought by crypto-assets that fall under the CSA jurisdiction. This strategic goal consists of (i) identifying the emerging regulatory issues related to technology that require regulatory action or clarity, and (ii) developing a tailored and effective regulatory response for significant issues identified.”

This stance, in addition to the more recent one described in Notice 21-327 above, are positive for the nascent blockchain sector, as the CSA clearly recognizes unique needs, and is ready to tailor their approach to regulation.  To read through the business plan in full, make sure to peruse the following document.

CSA Business Plan – 2019-2022

Canadian Securities Administrators (CSA)

The Canadian Securities Administrators (CSA) is self-described as an ‘umbrella organization’.  With Canadian securities laws being enforced on a provincial level, the CSA serves as a mediator, tasked with unifying the various regulatory bodies nationwide.

The organization lists their overall initiatives as providing,

  • Protection to investors
  • Fostering fair and transparent markets
  • Striving for a reduction in system risk

Operations at the CSA are overseen by a committee of professionals, each representing a respective territory or province.

In Other News

Canada is not the only nation trying to determine the best way to serve, and regulate, FinTech.  While still a young means of capital generation, equity crowdfunding has a few years head-start on blockchain based endeavours.  Perhaps, looking towards past actions taken towards regulation of North American crowdfunding will shed light on how new technologies such as DLT and blockchain will be treated.

Equity Crowdfunding in North America

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Joshua Stoner is a multi-faceted working professional. He has a great interest in the revolutionary 'blockchain' technology. In addition to this, he is a licenced Paramedic in Nova Scotia, Canada. As such, he can provide emergency care/medicine to any situation necessitating it.

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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nigerian

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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