The crypto-friendly nation of Japan has once again set the par for the course after announcing significant upgrades to their Initial Coin Offering (ICO) framework. The country was among the first to acknowledge cryptocurrencies and now, they have paved the way for further expansion of the security token sector.
Japan’s Financial Services Agency amended both the Act on Settlement Funds and the Financial Instruments and Exchange Act (FIEA). These changes include a slew of new regulatory requirements for those hosting ICOs that function similarly to securities. Now, these ICOs fall directly under the current securities regulations according to FIEA
The new classification means Japanese STOs must adhere to strict registration requirements. These requirements include items such as semiannual reporting and maintaining records of management personal. Additionally, Issuers must explain the mechanics of their token issuance, transfers, and settlements.
More Labor Intensive STOs
The “token mechanics” description clause has some businesses worried that the new security token issuance amendments create more harm than good. Some analysts predict that the necessary disclosure documents could be more expensive than traditional securities. Also, these disclosures could cause more delays for business seeking to gain access to capital via a blockchain-based strategy.
Importantly, the extra workload wasn’t added by mistake. Japanese officials continue to express concerns over monitoring the secondary security token markets. Officials worry that it will be difficult to prevent unauthorized transfers of security tokens.
Basically, officials believe the added efficiency and speed makes it somewhat too easy to transfer tokenized securities versus traditional securities. For example, Japanese officials recommend all private placement STOs utilize a password-protected site to avoid violating securities solicitation rules. Such as offering tokens to non-disclosed investors.
All token issuers must register for new licensing as part of the amendments. For example, companies seeking to issue security tokens via their own network must register as a Type-II business. As a Type-II entity, these firms will need to follow the strict staffing and governance models laid out in the new amendments.
Companies that opt to use a Broker-Dealer, versus issuing their own token, can avoid many of the registration requirements demanded from Type-II issuers. However, these Broker-Dealer firms must be registered as a Type I issuer. These regulations include handling submission of the token mechanics surrounding the STO on behalf of the business.
Japan – Crypto Ambitions
Japan recognized cryptocurrencies officially on April 1, 2017. In September 2017, the country recognized Bitcoin exchanges as legitimate businesses and enacted one of the first regulatory frameworks in the world. By October of that same year, Japanese officials actively began recruiting blockchain-based businesses. Today, many point to Japan’s foresight as one of the most important factors determining the fate of Bitcoin’s future
Japan Tightens the Belt
While Japan’s new regulations do place a larger workload on businesses entering the security tokens sector, they are seen by many as a necessary step towards the digitization of the economy. Japan remains at the forefront of the crypto revolution and, these latest amendments confirm that the land of the Rising Sun has no plans to shy away from blockchain investors.
VNX Exchange Hopes to Get in Front of Upcoming AMLD5 Legislation with Sumsub Collaboration
Recently launched platform, VNX Exchange, and compliance expert, Sumsub, have announced a new collaboration. This will see Sumsub provide the necessary technology, which will allow VNX Exchange to ensure compliance with European laws surrounding AML/KYC.
This move is a proactive one, being taken by VNX Exchange. They have indicated that they chose to collaborate with Sumsub, as they possess the ability to remain compliant with the upcoming AMLD5 European legislation.
These compliance measures are what allow for regulatory bodies to keep nefarious activity in check. This is done by, first, knowing who they are dealing with. This part is taken care of through KYC checks, which gather information such as legal names, place of residence, passport info, and etcetera. Next, AML puts roadblocks in place, designed to prevent the origins of money from being clouded.
Unfortunately, blockchain based endeavours (including digital securities), remain synonymous with nefarious activity, to date. Much of this stems from past markets that saw the ICOs boom and bust. The entire point of digital securities, however, is to offer the benefits of tokenization, through a regulatory compliant and legal manner. For this to be achieved, and to dispel pre-existing notions (warranted or not) surrounding blockchain based endeavours, AML and KYC remain of utmost importance.
As indicated above, compliance measures surrounding AML and KYC are of the utmost importance within the digital securities sector. Many companies have recognized this, and are in the midst of developing their own solutions for the issue at hand. The following companies are but a few of those leading the way.
Upon announcing their collaboration, representatives from each, Sumsub and VNX Exchange, took the time to comment. The following is what each had to say on the matter.
Alexander Tkachenko, CEO of VNX Exchange, stated,
“VNX Exchange is very serious about all aspects related to compliance and investor protection. For these purposes, we are leveraging the benefits and advantages of innovative compliance systems provided by Sumsub to create a seamless client experience and open access to the new class of liquid digital assets backed by venture capital investments.”
Jacob Sever, Cofounder of Sumsub, stated,
“AMLD5 is soon to gain full power and influence among all financial entities in Europe with reinforced AML demands. With many clients based in Luxemburg, such as JobToday, Wecan Group, etc., we see the demand for compliance and anti-fraud measures, and know how to ensure them. VNX is a serious and mature project, with founders and management from traditional well-respected foundations, so we are happy to provide them with a high-level solution, optimising compliance under the Luxembourg regulations.”
Founded in 2015, Sumsub is a tech provider operating out of London, U.K. Above all, services offered by Sumsub revolve around compliance. This includes KYC/AML, investor onboarding, and more.
CEO, Andrey Severyukhin, currently oversees company operations.
Founded in 2018, VNX Exchange operates out of Luxembourg. The team at VNX Exchange has recently announced the launch of their digital securities issuance platform, along with their inaugural STO.
CEO, Alexander Tkachenko, currently oversees company operations.
In Other News
Both, VNX Exchange and Sumsub, have found themselves in our headlines in the past. Now their past work has brought them together, as they work with one another moving forward. The following articles touch on past events pertaining to each company.
Gladius Fails to Pay SEC Fines
The blockchain-based cybersecurity firm, Gladius announced that the company dissolved this week. Unfortunately for Gladius token holders, the company chose to ignore the $12.7 million settlement payment the SEC imposed earlier in the year. Now, Gladius token holders are left holding the bag.
In what seems to be a growing trend, another SEC charged ICO dissolved before repaying investors. In this instance, Gladius received $12.7 in fines after self-reporting to the SEC in February. Understandably, the SEC showed some leniency towards the firm for their decision to self-report.
A Lenient Approach
As part of the SEC settlement, regulators didn’t impose any additional penalties on the firm. However, they did make the company executives agree to compensate investors fully. Also, the company was to register the tokens as securities. Gladius agreed to the terms but asked for multiple extensions on the repayment date. Rather than repaying investors, the company chose to dissolve.
News of the Dissolution
Investors first received the bad news via a November 22 telegram post. In the post, the company’s co-founder and chief technology officer, Alex Godwin described the decision. He explained that the firm “ceased operations effective immediately.” He also stated that the firm “no longer has funds to continue operations.”
As you could imagine, investors are furious over the turn of events. Investors feel as if the SEC’s approach lacked enforcement. Investors have even formed a Telegram chat group called the Gladius Rektiers to organize another strategy to reclaim lost funds.
Gladius entered the market in April 2017. The firm planned to utilize a combination of blockchain-based technologies to protect users. Specifically, the firm employed decentralized CDN and DDoS protection on the Ethereum Blockchain. Additionally, Gladius platform users could rent out unused bandwidth and computational power.
Interestingly, Gladius executives did decide to leave their open-source code available on GitHub. The team even welcomed developers to further their protocol on their now deceased website’s homepage.
Dipping on the Bill
While the Gladius dissolution is bad news, it joins a host of other SEC charged ICOs who skipped out on their deadlines. For example, AirFox missed an October deadline this year. Airfox entered the market as a mobile banking solution before the SEC charged the firm with selling unregistered securities.
Additionally, Paragon Coin missed its investor repayment deadline. As part of Paragon Coin’s SEC settlement, the company agreed to offer to repay investors and pay $250,000 in fines. For their cooperation, the SEC withheld fraud charges. Also, the company agreed to register their tokens as securities and adhere to all relevant regulations moving forward.
The Paragon Coin saga received premier coverage as it involved a well-known beauty pageant winner and the rapper – The Game. Currently, the Paragon Coin website tells investors that want a refund to submit before November. Notably, their SEC repayment settlement date already pasted back in July.
The Gladius Saga Continues
The decision to dissolve prior to adhering to the SEC’s demands could prove to be a costly one for Gladius. For now, investors are culminating their outrage to organize their next maneuver. Many expect to see additional charges in some shape or form against the company’s owners as regulators decide how to handle the news and investor outcry.
UKJT Views Digital Assets as Property Under Current Regulations
Digital Assets as Property
In a recently released, thorough report, it has been divulged by the UK Jurisdiction TaskForce (UKJT), that digital assets are satisfactorily covered under existing securities laws. More specifically, digital assets are typically viewed as property.
This is an important decision, as it provides industry participants with a much needed legal clarity regarding digital assets, moving forward. With many placing high expectations on the burgeoning digital securities sector, a clear government perspective is a boon towards the structuring of future endeavours.
While the document goes into much greater detail, the taskforce was able to summarize their decisions into a few brief points. The following is an excerpt from the document, showing their conclusions.
‘Whether English law would treat a particular cryptoasset as property ultimately depends on the nature of the asset, the rules of the system in which it exists, and purpose for which the question is asked. However:
(a) cryptoassets have all of the indicia of property;
(b) the novel or distinctive features possessed by some cryptoassets—intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation, rule by consensus—do not disqualify them from being property; 22 Legal statement on cryptoassets and smart contracts
(c) nor are cryptoassets disqualified from being property as pure information, or because they might not be classifiable either as things in possession or things in action;
(d) cryptoassets are therefore to be treated in principle as property;
(e) but a private key is not in itself to be treated as property because it is information.’
*For those interested in reading the entirety of the announcement, click HERE.*
A Differing Approach
The process, which culminated in the decision to treat digital assets as property, took roughly 6 months. Over this time, government representatives indicate(d?) that the taskforce took a different approach than most.
Sir Geoffrey Vos, The Chancellor of the High Court of England, indicated that the approach taken was to look for a way to regulate digital assets within the confines of the current system. This is in contrast to other nations which have looked to create new regulations for a nascent asset class, in what he likens to ‘working backwards’.
UK Jurisdiction TaskForce (UKJT)
The UK relies on multiple ‘taskforces’ which strive to pave the way for the digitization of the legal services sector. The UK Jurisdiction TaskForce (UKJT), is one of these groups.
In the report, it is indicated that the UKJT is comprised of 8 individuals from varying levels of government within the UK. The members are as follows.
- Sir Geoffrey Vos, Chancellor of the High Court of England
- Sir Nicholas Green, Chair of Law Commission of England and Wales
- Mary Kyle, City of London Corporation
- Christopher Woolard, Financial Conduct Authority
- Lawrenece Akka QC, Twenty Essex
- Richard Hay, Linklaters LLP
- Peter Hunn, Accord Project
- Sir Antony Zacaroli, Justice of the High Court
Being located in the UK, Smartlands is directly affected by the decision on the UKJT discussed here today. Reaching out to securities.io, Smartlands CMO, Yaroslava Tkalich, had to following to say on the announcement.
“As the first-ever UK-based platform specialising in tokenising the real economy assets on the Stellar blockchain, Smartlands enjoys substantial footing on the issue; with the clarification by a panel of judges and legal specialists, our almost two-year headstart turns into a major strategic advantage for years to come.”
Speaking with Arnoldas
While Ilia Obraztsov is now the CEO of Smartlands, we were fortunate to have interviewed Arnoldas Nauseda in recent months, while he held this position. Arnoldas has since transitioned into the role of Chairman, as this will allow for a greater focus on strategic expansion.
In Other News
As stated above, there are various approaches being taken by nations around the world, towards digital assets. The following articles take a deeper look at two, in particular, with regards to their stances – Malta, and the United States.