This month, the Chief of the Cyber Units division, Robert A. Cohen, announced that he will leave his position with the SEC in August. The news came via a press release in which the SEC praised Cohen for his years of service. In his time with the SEC, Cohen spearheaded investigations into multiple blockchain-based firms.
KiK’n it SEC Style
These high-profile cases include a lawsuit against the messaging app Kik. The lawsuit claims that KiK illegally sold $1 trillion Kin Token to over 10,000 investors worldwide during a 2017 ICO. The SEC noted that the platform failed to register with the SEC prior to the crowdfunding event. Also, the company didn’t provide investors with the proper disclosures required by firms accepting funds from US investors.
ICO Promoters are not off the Hook
Cohen wasn’t afraid to go after celebrities as well. In one instance, Cohen decided that the celebrity promoters, DJ Khaled and Boxing Champion Floyd Mayweather, bared as much guilt as the company itself. In this case, it’s alleged that Centra Tech hosted an illegal ICO without the proper SEC licensing. Additionally, both of the celebrity promoters received a $100,000 payment that wasn’t disclosed to the SEC. Notably, this case was dismissed.
A Pioneer in Cyber Law Enforcement
Cohen pioneered crypto law enforcement. During his time he is accredited with initiating protocols which led to a direct crackdown on fraudulent ICOs, token issuers, unregistered securities exchanges, and hackers, just to name a few.
The Emergence of Crypto
Importantly, Cohen was among the first generation of SEC officials tasked with dealing with the emerging crypto market. His guidance helped the SEC maintain a critical position in which the firm allowed the market to develop, but still held those committing crimes accountable.
Colleagues Agree – Cohen was a Leader
Speaking on Cohen’s decision, the SEC Chairman, Jay Clayton thanked him for his tenacity and determination. Particularly, he pointed out how Cohen’s leadership abilities made the creation of the Cyber Unit possible. Today, the Cyber Unit division handles all crypto-related crimes.
Clayton wasn’t the only one to find time to praise Cohen publicly. Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement explained how Cohen’s mentorship helped the SEC develop its Cyber Unit into an effective tool in the fight against cybercriminals.
Robert A. Cohen
Cohen joined the SEC in 2004. His decision to leave the agency comes after 15 years of service. During this time he held multiple high-rank positions. For example, in 2008, Cohen became Branch Chief before becoming Assistant Director in 2010. Then, He was the Co-Chief of the Market Abuse Unit before becoming Chief of the Cyber Unit.
Who’s After Cohen?
The SEC has been silent on who Cohen’s replacement will be. As the SEC faces new challenges, such as the emergence of cryptocurrencies globally, it’s important that the agency find an individual with a forward-looking mindset. For now, the cryptocommunity awaits their next move.
Digital Securities About to Go Mainstream with Germany’s New Draft Law
Digitization has led to significant changes in many areas, not the least in money and financial markets.
The financial markets and its participants are at a point where they cannot ignore technological developments bound to disrupt the industry. Recently, there has been a rush towards developing and implementing blockchain-based protocols to power financial products. The digitization wave is hitting the financial system and regulators are paying attention.
More specifically, Germany is moving forward with its plan to modernize its securities law with the introduction of provisions catering to blockchain-based assets.
New Draft on Legal Framework for Tokenized Securities
The German Finance Ministry published a statement wherein the institution will be working on a draft law with the primary goal of creating a legal framework for digital securities, including the issuance of tokenized assets.
The plan is to create legally secure regulatory frameworks and supervisory structures to protect and improve the integrity, transparency, and functionality of the financial markets.
The implementation of the proposed plan will see blockchain assets issued by German firms fall under the same regulatory provisions as the country’s stock market.
The intent from Germany’s institutions is clear: embrace and leverage blockchain technology.
Germany is the most influential actor in the European Union and naturally, it wants to play a significant role in the new paradigm of digital securities and the blooming decentralized finance sector.
A legal framework would enable new technologies to be used on a large scale. Already at the start of 2020, Germany had allowed local banks to sell cryptocurrencies to their customers. With huge steps forward, German legislators aim to increase the attractiveness of their financial sector allowing companies to issue and manage digital assets.
The milestone of the draft law is the change in paper document requirement for investment instruments like government bonds and stocks. The updated law would create a framework expanding this requirement to cover digital signatures for tokenized assets.
The draft is based off of existing frameworks in other countries that have already made progress in the regulatory space. As such, the proposal is to replace the currently mandatory physical security certificate for bearer bonds with an entry in a securities register.
According to the draft for electronic bonds, the security certificate document is to be replaced by an entry in a securities register. Naturally, a securities register can be kept in a digital format either privately and centralized or distributed with cryptography-based technologies like DLT or decentralized blockchains.
This makes it clear that the new electronic securities law considers assets issued via both public and private blockchains. This change could make regulated security token offerings (STOs) as the preferred method of issuing securities within the country.
Local companies looking to offer tokenized assets would still have to fulfill existing capital requirement laws.
Opportunities for Regulated Security Token Offerings on Public Blockchains
The legislator hints that the issuance of digital securities is not restricted to private systems. Instead, it would also be possible to be done on public blockchains. This would create the potential for securities, according to German law, to be issued on Ethereum, currently the most popular platform to issue digital assets on.
Even more importantly – if the regulations are established, the procedure would be eligible for digitizing stocks or investment funds.
In the press release expanding on the regulatory decision, the Finance Ministry’s statement reads:
“This proposed regulation also creates regulatory clarity: The Federal Financial Supervisory Authority will monitor issuance and the maintenance of decentralized registers as new financial services under the eWpG , the KWG and the central securities depository regulation.”
The monitoring of securities registers will be undergone by the German Federal Agency for Financial Market Supervision (BaFin). According to the draft, BaFin will grant licenses to companies looking to issue or convert traditional stocks into digital assets.
The newly drafted law is not specifically targeted towards blockchain-based assets, but it poses further development opportunities for the adoption of the novel technology in Germany.
As the press release states, the drafted proposal law is part of the government’s long-term pro-blockchain strategy.
After approving the sale of cryptocurrencies, 40 banks had reportedly applied for crypto custody licenses by February 2020. Earlier this year, BaFin also officially classified cryptocurrencies as financial instruments, following regulatory recommendations from the Financial Action Task Force (FATF).
Germany is taking big leaps to enable the adoption of blockchain technology in the country. Boerse Stuttgart, the country’s second-largest stock exchange is also active in the crypto market with a Bitcoin exchange-traded product (ETP) being launched earlier in the year.
Traditional Banks Ramp Up Custodial Services for Digital Assets
In recent weeks, we have seen an increase in the adoption of blockchain services, among traditional banks. First, U.S. based banks were given the green light to custody cryptocurrencies by the Office of the Comptroller of the Currency (OCC). Now, we learn that one of the largest banks in South Korea, KB Kookmin Bank, is already working to develop similar services.
With regard to South Korea, the plan is for KB Kookmin Bank to begin offering custodial services for digital assets. This is a group effort involving the following companies,
This collaboration is particularly noteworthy, as KB Kookmin Bank is not just any old bank. They are currently the largest bank in South Korea. Moves made by a bank of this stature are followed closely by many. Although KB Kookmin Bank and its partners may be first to the table, expect to see others take a seat in the near future.
Future Asset Expansion
While initial services will centre on the custody of cryptocurrencies, it is believed that this support will eventually grow, encompassing various types of digital assets. More specifically, it is expected that in time, these custodial services will support digital securities.
In commentary released by Hashed, this expansion of supported assets was touched upon. Hashed states that through this collaboration, participants anticipate, “…that the digital asset industry will not only involve cryptocurrencies, but also other traditional assets such as real estate, artwork, and other reified rights that will be issued and traded on blockchain platforms.”
Although cryptocurrencies stand to benefit first, the development of such custodial services has the potential to transform and usher forth new growth among the digital securities sector.
Office of the Comptroller of the Currency
In the weeks preceding the news surrounding KB Kookmin Bank and its forthcoming custodial service, we saw the OCC release of an interpretive letter on the subject.
In this letter, the OCC breaks down, not only what digital assets are, but how banks can support the growing use. The OCC summarized its stance, stating,
“The OCC recognizes that, as the financial markets become increasingly technological, there will likely be increasing need for banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers. By providing such services, banks can continue to fulfill the financial intermediation function they have historically played in providing payment, loan and deposit services.”
“…we conclude a national bank may provide these cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency. This letter also reaffirms the OCC’s position that national banks may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.”
Which came first, the chicken? Or the egg? This old saying could easily be applied to the current world of blockchain. Are these traditional banks jumping on board the train due to the recent resurgence being seen in the sector? Or is the sector surging due to banks jumping on board. Regardless of the answer, signs of blockchain adoption within traditional industries is a definite positive.
Hopefully, this swing in sentiment among banks continues to gain momentum, as banks have not always viewed digital assets in a positive light. Only months ago, we were reporting on difficulties being faced by German companies, as they were refused services by traditional banks.
KB Kookmin Bank
Founded in 2000, KB Kookmin Bank maintains operations in Seoul, South Korea. Since launch, KB Kookmin Bank has grown to employ over 25,000, while providing customers on a global scale with access to commercial banking services.
CEO, Hur Yin, currently oversees company operations.
Office of the Comptroller of the Currency (OCC)
The OCC is a U.S. based regulatory body, tasked with supervising national banks. This supervision is undertaken with the goal of ensuring fair and transparent financial services to all customers.
Acting Comptroller, Brian P. Brooks, currently oversees operations at the OCC.
Commissioner Hester Peirce Awarded 2nd Term at SEC
From now until 2025, the world of blockchain can look forward to at least one friendly face residing at the Securities and Exchange Commission. Earlier this week, Commissioner Hester Peirce was successfully voted into a subsequent term at the regulatory body.
The vote, which took place on August 6th, 2020, was completed by the U.S. Senate. While no outcome is ever assured, this decision had been anticipated for months now, as the initial nomination was put forth six months prior, on February 6th.
A History of Dissent
While there are a variety of reasons that the blockchain and cryptocurrency community have become enamored with Commissioner Peirce – earning her the moniker of ‘Crypto Mom’ – the most obvious is her previous statements of dissent.
A statement of dissent simply refers to the expression of a belief, contrary to those of others, and their actions made. In the past few years, Commissioner Peirce has voiced her dissent on multiple occasions.
Winklevoss Bitcoin Trust, 2018
The first statement of dissent, issued by Commissioner Peirce, revolved around the denial of a Bitcoin based exchange traded fund (ETF) application in 2018. While the main mandate of the SEC is to protect investors, Commissioner Peirce felt their actions did just the opposite. She stated, “…I am concerned that the Commission’s approach undermines investor protection by precluding greater institutionalization of the bitcoin market. More institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order.”
Exchange Traded Funds (ETF), 2020
In early 2020, Commissioner Peirce reiterated her opposing stance regarding cryptocurrencies and ETF type products. In the time between her initial statement on the Winklevoss fund in 2018 and now, the SEC had gone on to deny various applications – essentially doubling down on their stance. She stated, “…I warned that the Commission’s hesitancy to embrace new products and technologies impedes innovation in this country and threatens to drive entrepreneurs, and the opportunities they create, to other jurisdictions. The Commission’s actions in this area over the past eighteen months confirm these concerns. Meanwhile, investor interest in gaining exposure to bitcoin continues to grow.”
This example is the most recent of the three. Taking place in July of 2020, during a speech at Blockchain Week Singapore, Commissioner Peirce touched on why she thought the SEC’s actions against Telegram were flawed. While her stance was not divulged in an official statement of dissent, it was clear nonetheless. She stated, “Telegram chose to end its legal battle by settling with us. I did not support the settlement because I did not support the underlying action. I do not support the message that distributing tokens inherently involves a securities transaction.”
While it may be easy to disagree with one’s peers, Commissioner Peirce has ensured that she has provided more than just criticisms. Most notable is Commissioner Peirce’s ‘Safe Harbor Proposal’. In the Safe Harbor proposal, companies would benefit from “a three-year grace period within which they could facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws, so long as the conditions are met.” This is an interesting and important approach; time has proven that while many blockchain based assets may begin their lives as securities, they can later transform into a different class of asset. One such example is the wildly popular, Ethereum.
Ethereum, which held an ICO early in its lifecycle, has since become a functional decentralized platform and token. This simple transition, which was always planned, allowed for Ethereum to transform from being a security to simply a token.
By implementing a proposal such as this, innovative and well-intentioned companies would have more leeway to produce next-gen products, without the fear of repercussions from the SEC (providing the companies meet all the conditions). Commissioner Peirce’s Safe Harbor Proposal can be read in detail here.
Despite the SEC retaining a familiar face in Commissioner Peirce, the regulatory body may soon look quite different.
Although talk has died down for the moment, current SEC Chairman Jay Clayton is being floated as a candidate for a position as the U.S. Attorney for Southern New York. If this departure were to occur, Commissioner Peirce would, no doubt, be an exciting prospective replacement for the position of Chairman.
Such a move would, no doubt, be accompanied by differing approaches to blockchain and crypto markets, as Commissioner Peirce has made it clear that she believes the markets are here for the long run. Time will tell if Commissioner Peirce finds herself filling these shoes.
Securities and Exchange Commission
The Securities and Exchange Commission (SEC), is a U.S. based regulatory body, tasked with ensuring fair and transparent markets. This is done through the creation, and enforcement, of various laws surrounding the usage of securities.
Chairman, Jay Clayton, currently oversees operations at the SEC.
In Other News
In early 2020, we were fortunate to have completed an exclusive interview with Commissioner Peirce, herself. In this discussion, we learned more about her approaches to crypto and blockchain, as well as that of the SEC. For those interested in learning more about Commissioner Peirce, this interview can be found in its entirety, HERE.
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