The Baltic country of Lithuania seeks to become a major hub for security token activity across Europe. The country continues to welcome security token investments into their border with favorable regulations. In June, the country’s Minister of Finance, Vilius Sapoka, issued cryptocurrency and ICO guidelines. These helped Lithuania solidify its position as a top crypto country in Europe.
Lithuania managed to accomplish increased security token investment through a combination of factors. The Lithuanian Finance Ministry has long supported FinTech advancements. The country provides leadership in advanced IT infrastructure and alternative methods of accessing financing for startups.
In the About US section of Lithuania’s new crypto guidelines, Sapoka refers to the blockchain technology as a “phenomenon” that “cannot be ignored.” He also discussed the importance of minimizing the impact of this technology on the stability of current markets and reducing the ability of nefarious groups to use the technology to fund their organizations. Sapokja ends the section with a lighthearted joke referencing Lithuania as “#Litechnia.”
ICO & Crypto Guidelines
The Minister of Finance broke these guidelines down into four specific areas of importance. The four mentioned categories are regulation, taxation, accounting, and anti-money laundering (AML) / Combating Financing Terrorism (CFT).
This section begins with a description of an initial coin offering (ICO). The guidelines go into an explanation of security tokens. According to the guidelines, you are subject to securities regulations if your tokens:
- Grant rights to the company management process.
- Entitle token holder to a share in company profits.
- Offer interest on the investment.
- Promise redemption for costs through token sales.
Those organizations that offer security tokens will be required by the Bank of Lithuania to provide name, brand, financial information, platform structure, and management environment prior to approval.
The taxation section describes the asset class of cryptocurrencies. Here, the guidelines describe cryptocurrency as the same as fiat currency for the purpose of regulation. Additionally, the section states that certain types of tokens can fall under additional tax laws depending on their use. There is also a brief section on corporate vs personal crypto tax filing.
Interestingly, the guidelines place miners out of the taxation zone. That is unless they provide their mining services to others. Miners are tax exempt on the sale of mined cryptocurrency as well.
This section explains how ICO earnings should be accounted for. Token owners can learn how to claim their earnings depending on the type of token they issue. In the opening section, token issuers learn how to record their earning in the profit/loss statement.
AML / CFT
In this text, it is explained that Lithuania plans to amend their AML and CFT laws to include virtual currency. It lists exchanges and wallets as the first area to receive amendment.
Lithuania is officially the first country in Europe to host a security token offering (STO). The DESICO project claims the title as the first EU STO and it is of significant importance that the developers behind the project choose Lithuania as their base. In a public interview, developers pointed out Lithuania’s strong framework and ICO regulations as the reason for choosing the country.
Lithuania’s strong pro crypto stance makes the country an attractive option for blockchain investment firms. Lithuanian officials recognized the demand for more crypto regulation and made the necessary framework to facilitate growth. Now the country is poised to pioneer the security token revolution.
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.
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.
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.
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.