This week, the Securities and Exchange Commission (SEC) reached a settlement in its ongoing trial against Enigma MPC (Enigma). Importantly, Enigma executives accepted the settlement but did not admit to any wrongdoing. As such, the firm can now continue operations but is now registered with the SEC.
Enigma’s SEC troubles originated from the firm’s 2017 ICO. The ICO lasted from June to September 2017. During that time, Enigma issued 75 million ENG Tokens and raised approximately $45 million in ETH and BTC from investors. Specifically, the company sold discounted ENG Tokens during its Pre-sale. Additionally, the firm offered Simple Agreements for Future Tokens (SAFTs).
Enigma SEC Violations
The SEC alleged that Enigma offered and sold securities in violation of Sections 5(a) and 5(c) of the Securities Act of 1933 when it engaged in an unregistered initial coin offering (ICO). Regulators pointed out that the firm offered investment contracts during the campaign. Importantly, these securities were subject to regulations.
On the latter point, Enigma did file a Form D for exemption. However, the SEC didn’t approve the request prior to the company starting its ICO. Consequently, regulators pointed out the firm received no exemption to operate in the way it did.
SEC regulators pointed to a number of specific instances in which the firm violated regulations. For one, the company promoted purchasers’ reasonable expectation of profits. The idea of future profits came from various representations Enigma made to investors. Additionally, developers described how they intended to use the raised capital to develop its products and its business systems to earn profits.
Discussing the settlement, John T. Dugan, Associate Director for Enforcement in the SEC’s Boston Regional Office stated the facts. He pointed out that Enigma was “required, and failed, to register its ICO” prior to operations. Consequently, investors never received the information required under the current securities laws.
As part of the settlement, Enigma agreed to provide ICO investors with an opportunity to obtain compensation if they require it. To get a refund, investors must follow the SEC claim process. Additionally, the firm must pay a $500,000 civil penalty and register ENG Tokens as a class of securities with the SEC. As part of this registration, Enigma must file periodic reports with the SEC moving forward.
Time to Move Forward
In a recent blog post, executives defended their decision. Importantly, the company didn’t admit any wrongdoing. However, the firm did state that the settlement did clear the way for developers to focus fully on our original and continued vision of the platform.
Enigma entered the market in 2017 with the goal to provide users with groundbreaking privacy solutions that improve the adoption and usability of decentralized technologies. The platform allows digital asset traders to test trading strategies in a safe environment. Also, the firm will construct a marketplace for cryptocurrency-related data.
The Security Token Enigma
This settlement is just the latest in a long line of SEC trials wrapping up this year. Since early 2018, the SEC has continued with its ICO crackdown strategy. To date, multiple firms have reached settlements with these regulators. Unfortunately, some went out of business prior to repaying investors. For now, Enigma seems prepared to move on from this speed bump.
Multiple Canadian Securities Regulators Warn Against Halifax & Associates
Halifax & Associates – A Repeat Offender
A pair of Canadian regulatory bodies have now issued warnings to investors, regarding foreign companies selling illegal securities within the nation.
The first instance occurred in late March, when the Manitoba Securities Commission (MSC), brought the issue to light. In their statement at the time, the MSC named Denmark based, Halifax & Associates, as defrauding Canadian investors.
Fast forward a mere two weeks, and the Nova Scotia Securities Commission (NSSC), has had to contend with the same issues. Again, this prompted the regulatory body to issue warnings to prospective investors, as Halifax & Associates is not registered to offer securities within the province.
While the total number of investors – and the sums of money lost – is unknown, we do know that this is not an isolated occurrence.
The MSC specifically notes that a rural resident of the province was bilked out of more than $8000, while the NSSC notes that multiple investors were taken advantage of.
Proceed with Caution
Unfortunately, despite continued adoption among legitimate companies and investors, there continue to be select bad actors which utilize cryptocurrencies, such as Bitcoin.
In these particular scenarios, investors were advised to fund trading accounts with Bitcoin. From here, Halifax & Associates would provide them with access to services subject to securities laws – something that the company is not registered to offer in the provinces.
The MSC provides the following points for investors to adhere, and proceed with cation.
- promises of high returns with low risk,
- pressure to invest quickly / limited time offers
- secret or sans-serif”>‘insider’ information / exclusive offers
- offers from complete strangers
- unregistered salespeople and companies
- inconsistent details / avoiding questions / no paper trail
In their statement warning investors, Stephanie Atkinson, Acting Director of Enforcement at the NSSC, had the following to say.
“The internet can be a dangerous place to shop for investments…Always take the time to check registration and understand the risks and costs associated with your investments. Further, never give out personal information without verification of the legitimacy of operations. This is particularly important where the entity or individual is unknown. Becoming an informed investor is your best protection from falling victim to scams.”
In Other News
There will always be those that try and circumvent regulations. We cannot paint the blockchain sector with a broad brush however, as there are many which adhere to rules and regulations.
In Canada, there are various regulatory bodies which do their best to provide safety to investors, while facilitating start-ups through exemptions. With avenues existing which allow for potential exemptions, there is no valid reason to be offering unregistered securities.
For instance, a promising Canadian company has recently been awarded an exemption status, as they look to develop and grow. The following article touches on an example of this.
Central Bank of South Korea to Host 22mth Pilot for Potential CBDC
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.
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.
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.
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 Government Introduces New STO Regulations
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.
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.
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.
- Multiple Canadian Securities Regulators Warn Against Halifax & Associates
- Germany – Crypto Custody License Receives Push-back from Banks
- Central Bank of South Korea to Host 22mth Pilot for Potential CBDC
- Japanese Government Introduces New STO Regulations
- Lawsuits Goes After Some of the Largest Names in Crypto