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Ghana SEC ponders Security Token Framework

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Ghana SEC ponders Security Token Framework

Expansion

In recent news, it has come to light that the Ghana SEC is mulling over the idea of developing framework to govern digital securities. The intention is to effectively licence and regulate digital assets in the nation. This includes, not only cryptocurrencies, but digital securities as well.

This decision is being forced, as despite not currently being legal, residents in the small country have shown an affinity for trading digital assets. Recognizing this has led to the potential for framework and legalization to occur.

Commentary

Multiple individuals have commented on these moves being made. Both from the Ghana government and from industry professionals. They not only gave warnings on current activity, but spoke on the future potential of the industry. Here is what they had to say regarding these events.

Paul Ababio, Deputy Directo General of SEC, stated,

“…desist from dealing with these crypto entities…when you choose to go there you are on your own…we are still doing our research and gathering information and we welcome any input that people might have to help us formulate a view on how we should deal with it in Ghana.”

Richard Gardner, CEO of Modulus, stated,

“Currently, exchanges aren’t licensed in Ghana, as well as in many other places throughout the globe…The value in licensing is that it creates a standard rulebook — a set of regulations by which licensed exchanges must abide.”

He continued,

“The best way to regulate an industry, especially one which is so technical, is to bring together those involved in the private sector, along with those from the public policy side. Together, we can usually find a way to encourage industry growth while protecting consumers…It’s likely that they’re going to want to look at attempting to bring responsible oversight to the industry — through the use of new technology and a cutting-edge security apparatus, cryptocurrency exchange administrators must endeavor to bring an end to money laundering, abusive trading behavior, and market manipulation.”

Ghana

Ghana is a small nation in western Africa, with a population north of 30 million. Much like the United States, Ghana utilizes a regulatory body to oversee financial institutions and products. This is known as the Ghana Securities and Exchange Commission (SEC).

Modulus

Modulus is a FinTech company, established in 1997. The company maintains headquarters in Arizona, and functions under the lead of CEO, Richard Gardner.

Modulus has provided tech solutions to industry giants such as Microsoft, Siemens, Yahoo, NASA, and more.

In Other News

We have previously reported on both the global development of frameworks surrounding digital securities, and developments pertaining to modulus. Here is a quick look at a couple of articles detailing those developments.

Europe’s Security Token Regulations

Modulus Implements Securitize Tech-Stack

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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

Commissioner Hester Peirce Dissents on SEC Telegram Ruling and Settlement

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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 2018Popular messaging app Telegram raises $850M using the SAFT (Simple Agreement for Future Tokens) structure
March 2018Telegram raises an additional $850M using SAFT structure
October 2019Distribution of Telegram Tokens to Investors scheduled for October 31, 2019
October 2019SEC files an emergency action and temporary restraining order against Telegram to prevent the distribution of Telegram tokens to investors.
March 2020The court orders that Telegram may not distribute tokens to any investor, American and foreign
June 2020Telegram 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.

Moving Forward

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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Regulation

Ontario Securities Commission Alleges Coinsquare Committed Various Securities Violations

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Ontario Securities Commission Alleges Coinsquare Committed Various Securities Violations

The Ontario Securities Commission (OSC), a Canadian regulatory body tasked with ensuring fair and transparent markets, has released a detailed set of allegations against Coinsquare.

In its allegations, the OSC purports that Coinsquare knowingly took part in ‘wash trading’ for an extended period.  In doing so, Coinsquare was knowingly in clear violation of various securities laws.

What is Wash Trading?

Wash trading is an illegal practice that refers to the purposeful manipulation of trading markets, by way of buying and selling shares to artificially inflate the trading volume and pump up the share price.  Trading volume is important to traders, as high-trading volumes typically align with asset liquidity and value.

By taking part in wash trading, the offender is intentionally misleading traders.  Exchanges often choose to do it regardless, as they attempt to attract new business to their platforms.  More volume = greater liquidity = enticing to traders.

While not as prevalent as in past years, wash-trading has unfortunately been a common practice among many cryptocurrency exchanges.  Much of this was due to the unregulated nature of these exchanges in the early days of the industry.

Statement of Allegations, The Details

In its ‘Statement of Allegations’, the OSC provides a detailed breakdown of the various violations by Coinsquare.  In addition to simply wash-trading, the OSC indicates that the practice of wash-trading was well known among those in charge at the company.  More specifically, the OSC names the following individuals as being responsible for the practice.

  • Founder, Virgile Rostand
  • CEO, Cole Diamond
  • CCO, Felix Mazer

If the act of market manipulation was not enough, the OSC also indicates that an employee who brought forward knowledge of the wash trading to company executives was told by those same executives to continue wash trading.  Coinsquare is believed to have then taken reprisal against this employee.

A Timeline, According to the OSC

  • March 2018
    • Cole Diamond orders wash-trading to commence
  • July 2018
    • Coinsquare representatives publicly deny practices on various online forums
  • March 2019
    • Employees raise concerns about wash-trading practice to management
  • December 3, 2019
    • OSC completes unscheduled visit to inspect Coinsquare headquarters
  • December 4, 2019
    • Wash-trading is halted

During the time period when the wash-trading occurred, the OSC states that 90% of Coinsquare’s volume was faked.

Coinsquare

Founded in 2014, Coinsquare is a cryptocurrency exchange, headquartered in Toronto, Ontario.  Through its services, clients can buy/sell, trade, and cash out various cryptocurrencies.

CEO, Cole Diamond, currently oversees company operations.

Ontario Securities Commission

The OSC is a regulatory body based in Ontario, Canada.  The OSC is tasked with ensuring fair and transparent markets for companies and investors by enforcing compliance with the governing rules and regulations.

Grant Vingoe is the current Acting Chair and CEO of the OSC.

In Other News

Coinsquare and QuadrigaCX represented, arguably, the most well-known Canadian cryptocurrency exchanges.  Unfortunately, each has dealt with its own share of controversial issues, with only Coinsquare remaining operational to date.

For those interested in an alternative, the upcoming cryptocurrency trading through WealthSimple has the potential to become a leader in the space.  WealthSimple has developed a positive reputation in its time operating as a financial service provider, and is expected to deliver a polished, and transparent service.  To learn more about this upcoming service, make sure to read our recent article detailing what it will entail.

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Digital Securities

Swiss Digital Bank Tackles Asset Tokenization for Fully Compliant Institutions

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Swiss Digital Bank Tackles Asset Tokenization for Fully Compliant Institutions

Real-World Asset Tokenization Done in Switzerland

Asset tokenization, is the space where traditional assets and digital tokens intercept to allow issuers to build completely new financial products and investors to participate in new ways.

Even if there’s still some way to go, there has been a lot of progress made in the digital asset space to enable tokenization of real-world assets. Testament to this is also the recent announcement from SEBA, a Swiss regulated banking entity.

Founded with a mission to bring closer traditional finance and digital assets, the digital bank has now signalled that it’s entering the asset tokenization space. In this regard SEBA aims to develop innovative solutions where their clients can issue and manage financial assets on multiple blockchain protocols and make these easily accessible to investors.

The digital bank is no stranger to digital assets, as it already offers a suite of services around these, from digital custody to trading, transaction banking as well as crypto-collateralized lending.

SEBA as a regulated entity, follows a fully compliant path in order to target large institutions. The Swiss financial institution wants to work with banks, professional investors, family offices, asset managers and other blockchain companies.

As such, the bank’s entrance in the space is accompanied by a partnership with Digital Asset Shared Ledger (DASL) which is built on the enterprise blockchain Corda.

SEBA Partnering with Liquidity Network DASL

The bank will leverage the Digital Asset Shared Ledger (DASL) to expand its services which is a liquidity network for digital assets. DASL facilitates the transfer of digital assets across the public Corda network which is a peer-to-peer network of DLT nodes, enabling interoperability across multiple systems, apps, and processes.

As a result, this partnership will allow SEBA to provide institutional clients the ability to issue and invest in digital securities representing financial instruments on the Corda network.

DASL’s securities offering includes several capabilities including issuance, portfolio management, asset servicing, clearing and settlement – all powered by distributed ledger technology (DLT). Furthermore DASL’s network capabilities are fully compliant with securities regulations.

The bank already has several services for their clients that relate to digital assets, and asset tokenization will be offered as a complement to SEBA’s Custody, Asset Management and Trading product.

As part of the asset tokenization offering, according to SEBA’s description, clients will be able to tokenize fiat and precious metals, alternative assets like real estate and commodities as well as explore tokenized ecosystems of companies with products (as utility tokens) and conduct security token offerings.

SEBA will create a wallet for onboarded custody customers, issue digital securities and distribute them to wealth management and other investor networks. In partnering with DASL, SEBA relies on the team’s experience building critical infrastructure for financial institutions.

A Partnership for Further Development

While still at an inception phase, the partnership may bring further product generation and liquidity creation over time, where DASL will support SEBA Bank’s strategy to be a partner to institutions.

Matthew Alexander, Head Tokenization at SEBA Bank, explains how important it is to build a trusted platform for the adoption of digital asset securitization:

“Widespread adoption of Digital Assets and securities by institutions requires trusted venues for distribution and for secondary trading and liquidity. DASL provides SEBA with an immediate and secure platform for our Digital Securities product range. We look forward to combining our strengths with those of DASL to further enhance our client solutions and services.”

“We are delighted to partner with SEBA Bank and bring them onto the public Corda Network with DASL.DASL provides an accelerator to the digital capital markets for SEBA’s institutional clients.” stated Richard Crook, Founder DASL.

Over the last two years, SEBA has made notable strides in the digital asset space. The Swiss crypto bank managed to significantly expand its products and services to the institutional market. Earlier this year, SEBA also raised $100 million in funding six months after receiving the banking license in August 2019.

Opening up the door for asset tokenization to institutions is one of the key aspects to widespread adoption of digital assets on a large scale. Once institutions that follow rigorous compliance measures can issue, manage, and trade digital asset securities, it could open the floodgates for interest from a wide variety of investors on a global scale. This could be a critical point that kickstarts the transition from traditional asset securitization to all-digital.

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