The NEO Project’s “NEO Global Development” (NGD) group announced last week that it had formed a consortium to explore and understand the growing digital securities sector. The alliance, dubbed the Digital Asset Alliance (DAA), will endeavor to articulate and document the nuances of security laws as they apply to asset tokenization across different jurisdictions and assets classes.
The DAA opened its new Medium.com blog with this statement:”Digital Asset Alliance is a NEO backed initiative discussing security token related issues. We aim at building an open-source platform for security token life-cycle service providers, and developing best practices for the growth of tokenized networks.”
Helping to foster development and community
The Digital Asset Alliance aims to cultivate consensus, thus enabling NEO blockchain developers, as well as the global blockchain development community at large, to create a legally compliant security token standard. NEO’s NEP-5 standard can already be applied to security tokens, though it is up to the issuer to implement regulatory criteria at the smart contract level.
NGD global business development manager, Tamar Salant, said, “We will be collecting insights and then presenting them to the community and saying, you know, ‘These are the top 10 highest priorities – How do we translate this into code? How do we make sure this is in every smart contract?’ Because we know this is a standard that is very much needed. And I think when we’re looking at securities and digital assets, we’re touching on a few different fields.”
Onboarding industry players
The DAA will bring together a diverse group of parties drawn from what Salant calls the “supply chain of security tokens”: “Our virtual round table is a gathering of people from all across the globe, whether its issuance platforms or projects, or law firms, or liquidity providers, or AML/KYC providers – we’re getting a sense of what everyone is looking at.”
The blog introduced some of the first security token industry players to join the DAA:
- Better Alternatives, an Israel-based boutique blockchain advisory firm working with two STO projects hoping to launch in the U.S. in 2020.
- DLx Law, a New York City-based capital markets law firm pivoting to focus on the security token space.
- Globacap, a London-based STO sandbox regulated under the UK Financial Conduct Authority, going live with it first two STO launches in March.
- Hashgard, a Shanghai-based STO services provider developing its own security token standards.
- Liquefy, a Hong Kong-based STO platform planning to launch its first STO sometime in 2019.
- Republic, a New York City-based crowdfunding platform with a mission to enable retail investors to invest in seed-stage startups.
- Vertalo, an Austin Texas-based security token investor matching, compliance, and cap table solutions provider.
A global blockchain securities compliance hub
The mission of NEO’s existing “Global Blockchain Compliance Hub” repository will be expanded to complement DAA’s mission. Tamar Salant explained, “We’re starting to create specific categories in regards to STOs. So, not just about using blockchain technology or tokenizing assets, but really looking at the existing securities laws. So many regulators out there are issuing sandboxes, and new regulations, and new ‘simple English,’ as the SEC put it, in terms of a kind of framework. So, what we want to do is create a subcategory or just a very specific category within the Blockchain Compliance hub, specifically talking about STOs and digital assets. If there are any community members out there who have a specific interest in securities laws, we’re happy for them to submit.”
CFTC Labels Ether a Commodity
The crypto community got some exciting news this week after the Commodity Futures Trading Commission (CFTC) Chairman stated that Ether (ETH) is a commodity. The news follows similarly worded statements from SEC officials in the past.
The news came via an Oct 10 statement from acting CFTC Chairman Heath Tarbert. In the post, the Chairman announced that he believes Ether is not a security at this time. The news comes at a critical point in Ethereum’s development.
The news is a huge win for the Ethereum community. Currently, Ethereum is the second-largest cryptocurrency in the world by market cap ($20 billion). The ruling is important because it means Ether falls under CFTC regulations and not SEC securities regulations. Consequently, the decision allows financial institutions to offer a wide array of new products and open up entirely new markets moving forward.
Ether Futures and Derivatives
In the past analysts pointed out that the Ether derivatives market suffered due to the lack of transparency. Tarbert now says that you can expect to see both Ether futures and derivatives markets in the very near future. Surprisingly, he stated that these financial tools would hit the market in less than a year.
According to the Chairman, Ether is a case of a transformative token. Basically, the token started as a security during the ICO event. At that time the enterprise was playing a controlling role over the digital asset. As time progressed, the Ethereum enterprise faded to the background as the cryptocurrency decentralized. Now the token serves as a utility.
Additionally, Tarbert described the reverse scenario in which a utility token slowly develops into a security. In this situation, you start off with a fully decentralized organization. Over time, the enterprise steps back in to take more control. Consequently, this creates a scenario where investors seek profits from the efforts of others. Now the token is a security.
Notably, SEC officials stated that they do not consider Ether a security in its current state. However, both the SEC and CFTC did point out that during the company’s ICO, Ether acted as a security. Luckily the SEC declined to fine the Ethereum development team for its ICO.
Bitcoin is a Commodity
Falling along this line of thought, Tarbert explained that Bitcoin is also a commodity. This statement coincides with the SEC’s decision to decline to label Bitcoin as a security. Analysts consider these actions as a precursor to this week’s news.
PoW to PoS
Also, Ethereum developers announced a shift from the Proof-of-Work (PoW) consensus algorithm to a more energy-efficient alternative, a Proof-of-Stake (PoS) consensus mechanism. PoS systems don’t require your PC to do heavy computations. Instead, users earn rewards for “staking” tokens in their wallets. In this manner, PoS tokens use far fewer resources.
Ether Moving Forward
The Ethereum community has much to celebrate moving forward. The cryptocurrency continues to see development across the entire sector. You can expect to see the Ethereum community expand as more ETH-based products enter the market in the coming months.
SEC Seeks Input on ‘Boston Securities Token Exchange (BSTX)’ Proposal
Launching Markets – BSTX
The Boston Securities and Token Exchange (BSTX) has recently filed a proposal for various rule changes with the SEC. These changes would allow for BSTX to launch what would be the market’s first digital exchange supporting full-fledged digital securities.
The Boston Securities and Token Exchange is a by-product of a partnership between tZERO and BOX Digital. This pairing of companies launched the joint venture in mid-2018, with the intent to develop the first fully regulated digital exchange in the U.S.
BSTX is expected to utilize blockchain technology provided by tZERO, while BOX representatives work towards establishing regulatory clearance. With each providing different areas of expertise to BSTX, both tZERO and BOX have made it clear that this is a joint venture, with each having a 50% say.
The proposed rule change discussed here dates back to late June, 2019. At the time of the filing, it was viewed as having the potential to create a ‘rulebook’ for the operation of such exchanges in the United States. Only now, months later, is the SEC making the filing available for public commentary.
A few of the noteworthy attributes of their proposed exchange are as follows:
- Asset ownership recorded using a private blockchain
- Trading enabled through use of BSTX tokens
- Whitelisted clients
At the initial time of its filing, we took a brief look at BSTX and their plans, including the use of an in-house token developed by the exchange.
In their filing, made public by the SEC, the BSTX begins by outlining their plans and intentions for the proposed exchange.
“BSTX would operate a fully automated, price/time priority execution system for the trading of “security tokens,” which would be equity securities that meet BSTX listing standards and for which ancillary records of ownership would be able to be created and maintained using distributed ledger (or “blockchain”) technology.”
Boston Securities and Token Exchange (BSTX)
Operating within the United States, BSTX is a proposed digital securities exchange, which was founded in 2018. The company looks to become the first exchange of its kind, supporting full-fledged digital securities.
CEO, Lisa Fall, currently oversees company operations.
In Other News
Whether it be through the backing of others, or through their own endeavours, tZERO remains hard at work, establishing the digital securities sector.
We were recently fortunate enough to have interviewed tZERO CEO, Saum Noursaheli. In this exclusive interview we discuss past and future events pertaining to the company. Make sure to check out the following interview to learn more!
Reggie Middleton Enters SEC Settlement Discussions – Veritaseum
This week saw the continuation of the SEC ICO crackdown. As such, regulators announced that they entered into a settlement discussion with Reggie Middleton. Middleton was the brains behind the 2017 Veritaseum (VERI) ICO.
The case was brought before the New York Eastern District Court with the filing published on October 2, 2019. In the filing, the SEC alleges multiple instances of misconduct from the firm. Now regulators want Middleton to pay $14.8 million in settlement fees.
Importantly, the SEC claims that on multiple occasions Middleton denied that VERI tokens were securities. He went as far as to refer to these tokens as software on numerous occasions. Regulators pointed out that he also told investors that the tokens were similar to gift cards.
To this extent, the SEC claims that Middleton actively misled investors. He hid the overall risks involved with the business maneuver. Additionally, he altered his business plan on numerous occasions to keep investors from realizing his true intentions.
After receiving numerous investor complaints, the SEC moved to freeze Middleton’s assets in August. Regulators sought out a court order to ban Middleton from participating in digital asset securities offerings or conducting business in general.
Judge Reschedules Trial – Veritaseum
The trial was originally set for Oct 8, but after reviewing the case, Magistrate Judge Ramon E. Reyes rescheduled the pre-trial for November 14. This decision was made to give both parties more time to prepare for the trial.
More Money More Problems – Veritaseum
Things are not looking bright for Middleton. His firm suffered numerous shady dealings throughout the 2017 ICO process. For example, a hack that occurred during the preliminary crowdfunding stage resulted in a loss of $8 million. Not surprisingly, these funds were never recovered.
Miss Appropriation of Funds – Veritaseum
Furthermore, regulators claim that Middleton miss-appropriated $520,000 of investor’s funds. These stolen funds went towards personal expenses Middleton accrued according to the court filing.
SEC Wants Blood
News of this settlement follows a string of high profile cases in which numerous firms saw hefty fines. In one instance, Sia received a fine of $225,000 for a 2017 ICO in which the company raised $120,000. EOS developers got a smaller fine, in terms of percentage, of $24 million for its ICO in which the company raised $4.1 billion. Sia developers stated that they hoped for a more lenient fine after seeing the results of the EOS trial. Unfortunately, SEC regulators didn’t feel the same way about the issue.
Despite the fines being almost double what the firm raised in its ICO, the company did receive some good news. The SEC decided that Sia coins were not a security. Therefore, Sia has the green light to continue operations on its blockchain-based cloud storage platform.
SEC vs Middleton
It’s hard to say exactly how the SEC will treat Middleton for his actions. If regulators decide his ICO was a scam from the get-go, you could expect to see fines in excess of the company’s ICO earnings. For now, the cryptocommunity awaits the start of the November trial.