It was recently announced that Paxos, a New York based blockchain company, has successfully received a ‘no-action letter’ from the Securities and Exchange Commission.
This letter, which is a response to an application filed by Paxos on October 25, 2019, paves the way for Paxos to begin offering blockchain based settlement services.
What is a No Action Letter?
One of the major hurdles continuing to plague the world of blockchain, is the ambiguity surrounding securities laws. There have been various companies, to date, that have acted in violation of securities laws, while under the assumption that they were not.
In order to avoid confusion, and possible future repercussions by the SEC, companies can apply for what is called a ‘no-action letter’. This application essentially allows the SEC to evaluate a company’s actions, before they are taken, determining whether or not they will result in any violations. By successfully attaining a ‘no-action letter’, the applicant can rest assured that provided they adhere to the specifics of their application, they will not be subject to any future enforcement measures.
The entire purpose of their application for a ‘no-action letter’, is to evaluate the viability of a settlement platform. Paxos indicates that this platform, which has been under development for multiple years, aims to provide clients with a variety of benefits versus settlements through a traditional clearing house.
Paxos notes the following points as areas in which their platform improves on traditional methods.
- Access to Short Settlement Cycles
- Immediate Access to Settlement Proceeds
- Increased Data Accuracy and Visibility
- Security and Availability
Simply put, this new platform has the potential to provide traders with a means of freeing up capital – post trade – in a secure and transparent manner.
While adoption of these services will surely grow in time, the platform looks to hit the ground running, with multiple clients already lined up. This includes both of the following banks.
- Credit Suisse
- Societe Generale
The participation by these banks should come as no surprise, as they have been known to dabble in blockchain over the past few years. For example, Societe Generale recently utilized the Ethereum network to issue and settle a $100M EUR bond.
In response to their application, the SEC broke down their decision in detail. While full details can be found HERE, the following excerpt outlines their decision as a whole.
“Based on the facts and circumstances described in the Request, and without necessarily concurring with your conclusions and analysis, the Staff would not recommend enforcement action to the Commission against Paxos if Paxos engages in the proposed activities described in your Request without registering with the Commission as a clearing agency pursuant to Section 17A(b)(1) of the Exchange Act.”
Operating out of New York, New York, Paxos is a blockchain company which was founded in 2012. Above all, the company works to serve the sector through the development of a variety of services including stablecoins, settlement capabilities, and post-trade activities.
CEO, Charles Cascarilla, currently oversees company operations.
The Securities and Exchange Commission (SEC), is a United States based regulatory body. This outfit is tasked with ensuring fair and transparent markets surrounding the issuance and use of securities.
Chairman, Jay Clayton, currently oversees operations at the SEC.
Canadian Securities Administrators (CSA) Address Crypto-Assets within Regulatory Framework
The Canadian Securities Administrators (CSA) have recently issued Notice 21-327 – ‘Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets’.
The title may be a mouthful, but the goal is simple – Educate trading platforms and the public, alike, on how securities regulations pertain to their activities.
For the purpose of education, it may be easier to understand the instances in which securities laws DO NOT apply, rather than the many instances in which they do. The CSA indicates the following:
“Platforms would not generally be subject to securities legislation if each of the following apply:
- the underlying crypto asset itself is not a security or derivative; and
- the contract or instrument for the purchase, sale or delivery of a crypto asset
- results in an obligation to make immediate delivery of the crypto asset, and
- is settled by the immediate delivery of the crypto asset to the Platform’s user according to the Platform’s typical commercial practice.”
As made obvious from the above points, there really are not many instances in which exchange based activity does not fall within the purview of existing securities laws.
Whether through a misunderstanding of current regulations, or intentional disregard, many active exchanges within Canada are currently in violation of various securities based regulations. For users of these exchanges, and the companies themselves, the CSA does their best to provide clarification on how exactly securities regulations apply to their activities. For those worried about, or simply curious of, this application, make sure to read the notice HERE.
Stifling an Industry?
While some may view the notice as a fear tactic, looking to stifle a quickly growing industry, the CSA does their part to quell this notion. The organization wants the public to know that they do, indeed, support technological growth, and their own adaptation to the times.
The CSA takes the time to close out their notice with the following statement,
“We welcome innovation and recognize that new fintech businesses may not fit neatly into the existing framework. The CSA Regulatory Sandbox is an initiative of the CSA to support fintech businesses seeking to offer innovative products, services and applications in Canada. It allows firms to register and/or obtain exemptive relief from securities law requirements, under a faster and more flexible process than through a standard application, in order to test their products, services and applications throughout the Canadian market, generally on a time-limited basis.
Several firms that have businesses or projects that involve crypto assets have been registered or have obtained exemptive relief from the securities law requirements”
Playing in the Sandbox
While many players in the sector may be playing by their own rules, various companies have come forth in an attempt to work with regulators. The following list is comprised of those which have, thus far, been admitted to the aforementioned CSA Sandbox, attaining certain exemptions from existing laws.
- ZED Network Inc.
- TokenGX Inc.
- Majestic Asset Management LLC
- Rivemont Investment Inc.
- 3iQ Crop.
- Token Funder Inc.
- Ross Smith Asset Management ULC
- First Block Capital Inc.
- Impak Finance Inc.
- Angel List LLC, and AngelList Advisors LLC
Strategic Goal 6
The issuance of Notice 21-327 comes as no surprise. The CSA has long been privy to the advancements being made within the world of blockchain; So much so, that the CSA specifically singled out the industry within their most recently released business plan.
Released in mid-2019, this business plan addresses various strategic goals within a 3 year time frame. Coming in at #6 was their intent to ‘respond to technology-related emerging regulatory issues.’
Of the 4 initiatives comprising ‘Strategic Goal 6’, 3 pertain to crypto-assets and their place within securities regulations. These 3 initiatives are as follows:
- Propose a regulatory regime for crypto-asset trading platforms
- Consider custodial requirements in relation to crypto-assets
- Consider the capital raising and issues that may be unique to aspects of blockchain based securities
The CSA summarizes the rationality behind this increased focus on blockchain and DLT technologies by stating,
“DLT has the potential to transform the landscape of the financial industry. Crypto-assets are probably the most well-known and widespread application of blockchain. The CSA will consider possible changes to adapt the current regulatory framework to address the unique challenges brought by crypto-assets that fall under the CSA jurisdiction. This strategic goal consists of (i) identifying the emerging regulatory issues related to technology that require regulatory action or clarity, and (ii) developing a tailored and effective regulatory response for significant issues identified.”
This stance, in addition to the more recent one described in Notice 21-327 above, are positive for the nascent blockchain sector, as the CSA clearly recognizes unique needs, and is ready to tailor their approach to regulation. To read through the business plan in full, make sure to peruse the following document.
Canadian Securities Administrators (CSA)
The Canadian Securities Administrators (CSA) is self-described as an ‘umbrella organization’. With Canadian securities laws being enforced on a provincial level, the CSA serves as a mediator, tasked with unifying the various regulatory bodies nationwide.
The organization lists their overall initiatives as providing,
- Protection to investors
- Fostering fair and transparent markets
- Striving for a reduction in system risk
Operations at the CSA are overseen by a committee of professionals, each representing a respective territory or province.
In Other News
Canada is not the only nation trying to determine the best way to serve, and regulate, FinTech. While still a young means of capital generation, equity crowdfunding has a few years head-start on blockchain based endeavours. Perhaps, looking towards past actions taken towards regulation of North American crowdfunding will shed light on how new technologies such as DLT and blockchain will be treated.
SEC Provides Warning on ‘Initial Exchange Offerings (IEOs)’
Capital generation events can come in many different forms. For those involved in the world of blockchain, the terms ICO, STO, and DSO have most likely become common terminology. Another variant of these type of events is known as the IEO or ‘Initial Exchange Offering’.
Since first capturing investors’ attentions in early 2019, IEOs have gone on to largely replace the ICO, as they are commonly viewed as a safer means of practice. This sense of security is often due to the belief that projects are legitimate, since they are being hosted on an exchange, and that they represent better investment opportunities.
They, however, do not come free of danger. The Securities and Exchange Commission (SEC) has recently released a notice/warning to those that have taken, or are thinking of taking, part in an IEO.
In their notice, the SEC clearly iterates that ‘there is no such thing as an SEC-approved IEO’. Even if not making this claim, the SEC warns that many IEOs may be selling securities disguised at utility tokens (intentionally or not).
Whats the Difference?
When IEOs were first rising in popularity, we were fortunate to have guest contributor, Liza Aizupiete (Managing Director at Fintelum), share her thoughts. In her contribution, Aizupiete touches on the differences between what constitutes an ICO versus an IEO.
Are They Worth Your Time?
Our very own Antoine Tardif, CEO of Securities.io, also took the time to pen his thoughts on the recent performance of IEOs. His findings led him to the conclusion that, “what is currently more important than the actual project being listed, is where the project is listed. We anticipate that once regulated security tokens increase in popularity, that IEOs may be an enticing option to list these security tokens on regulated exchanges. This would be similar to how stock exchanges currently operate.”
While the SEC address a variety of points in their notice, there are two statements in particular that shed light on to their stance. The following are excerpts from their notice, demonstrating this.
Is the IEO a securities offering?
“There are important issues investors should be aware of before investing in an IEO. As in the case of ICOs, depending on the facts and circumstances of the offering, the offering may involve the offer and sale of securities. This means the IEO may be subject to registration requirements that apply to offerings under the federal securities laws. Among other things, registration means that the company offering the digital asset has to provide important disclosures about itself, its business, the digital asset offered, and the terms of the offering to investors.”
Is the platform a securities exchange?
“In addition, if the IEO involves securities, the online trading platform on which the IEO is being offered may need to register with the SEC separately as a national securities exchange or operate pursuant to an exemption, such as an alternative trading system (ATS). An ATS must be a registered broker-dealer and comply with applicable requirements in order to legally operate in the United States.
The federal laws and regulations governing registered national securities exchanges and ATSs are designed to protect investors and prevent fraudulent and manipulative trading practices. Many online trading platforms may give the misimpression to investors that they are registered or meet the regulatory requirements for a national securities exchange or ATS, and therefore may lack the investor protections that a national securities exchange or an ATS provide to investors.”
The Securities and Exchange Commission is a U.S. based regulatory body, tasked with creating and enforcing laws which pertain to assets deemed securities. The goal of this is to foster the growth of a fair and transparent market for all participants.
Chairman, Jay Clayton, currently oversees operations within the SEC.
In Other News
Beyond simply reiterating their stance on what constitutes a security, and subsequent warnings on potentially violating regulations, the SEC has been hard at work. One example of their other endeavours is a recent proposal put forth, which would see various amendments made to the definition of an ‘accredited investor’.
After Months of Silence by ICOBox, the SEC Seeks ‘Default Judgement’ and ‘Permanent Enjoinment’
Beginning roughly 4 months ago, the SEC set their sights on ICOBox, and actions taken by the company and its founder throughout 2017. The SEC states,
“ICOBox, an incubator for digital asset startups, was founded in mid-2017 by Evdokimov, its CEO and “vision director”. To raise funds, defendants sold approximately $14.6 million worth of securities in the form of digital assets called “ICOS” tokens. Between August 9, 2017 and September 15, 2017, defendants sold ICOS tokens to over 2,000 investors, in the United States and globally…By not registering the offering with the SEC, defendants violated the securities laws’ registration requirements”
Unfortunately, despite being made aware of the various charges laid against them, the SEC and Courts have been met with nothing but silence.
The aforementioned lack of response has led to the recent developments, to be discussed here today. By failing to respond to the SEC’s filing, in September of 2019, ICOBox and its Founder, Nikolay Evdokimov, have essentially forced their hand.
Backed into a corner by the silence demonstrated by ICOBox, the SEC has filed for a ‘default judgment’ on their accusations of alleged securities violations. Simply put, a ‘default judgement’ refers to a ruling put forth by a Judge, when presented with a case where the defendants remain absent from the proceedings without valid reasoning.
While there existed the possibility of defending their actions, should a default judgement be awarded, ICOBox essentially forfeits this right.
While a default judgement is being sought, the SEC has not stopped there. In their recent filing to the courts, the SEC attempts to build a case, which demonstrates the intimate nature between ICOBox and its founder, Nikolay Evdokimov.
The SEC hopes to show that Evdokimov was, not only the face of the company both internally and externally, but that he had a direct hand in the actions undertaken by ICOBox.
In doing so, the SEC hopes for the court to award a ‘permanent enjoinment’ of, both, the company and its founder. A ‘permanent enjoinment’ refers to a court enforced prohibition of certain activities imposed upon specific entities – in this case, ICOBox and Evdokimov.
When this saga first began, in September of 2019, we reported on the initial steps taken by the SEC. The allegations raised by the regulatory body, at that time, are only now coming to an end, as they look to close out the case and move on.
Requests of the Court
In their filing, the SEC elaborates on the various infractions committed by the company and its founder. They proceed to list various suggested/requested actions to be taken by the court against the defendants. The following are a few examples of their requests.
- ICOBox and Evdokimov should be permanently enjoined
- The Court should order joint and several disgorgement with prejudgment interest
- The Court should order second tier penalties against Evdokimov
- Default Judgement Should be Entered Without Delay
Launched in 2017, ICOBox was a service provider for companies looking to host token based capital generation events, such as ICOs and STOs. Since their inception, ICOBox has helped its clients raise over $650M, in addition to raising over $14M in funds through their very own ICO.
Company operations were overseen by Founder, and CEO, Nikolay Evdokimov.
In Other News
While every case surrounding illegal activity brought forth by the SEC is an important one, there are two, in particular, that have found themselves creating headlines in recent months. These would be the situations developing around, both, Ripple and Telegram. Each of these companies have been accused of actions violating existing securities laws. On various occasions we have covered these events as they develop. To learn more about these on-going cases, make sure to peruse the following articles.
- Canadian Securities Administrators (CSA) Address Crypto-Assets within Regulatory Framework
- SEC Provides Warning on ‘Initial Exchange Offerings (IEOs)’
- New Shore Invest Starts a New Ship Finance Platform
- iSTOX Builds Upon Recent Successes with a Further $5M in Funding
- US Global Securities to Act as ‘Lead Financial Advisor’ for $50M Raise by Custodial Platform, Koine.