This week, SEC Commissioner Hester Peirce put forth a new proposition dubbed the Token Safe Harbor Proposal, also known as Proposed Securities Act Rule 195 – Time-limited Exemption for tokens (“Safe Harbor Proposal”). The proposed regulation would set forth new rules regarding digital assets and their classifications. As such, the proposal could represent a dramatic shift in the US’s policy on crypto currencies.
Commissioner Peirce released her new Safe Harbor Proposal at a speech held in Chicago on Feb. 6. In her discussion, she explained the nuances of the Safe Harbor Proposal. Peirce laid out various examples as to why the US needs to focus more on the regulation of digital assets that may not be deemed as securities.
During the speech, the Commissioner set out her vision for a new course for compliant blockchain projects operating within the US’s borders. During the discussion, Peirce pointed to the lack of transparency surrounding the token taxonomy currently in place. She explained that this opaqueness has hurt the US blockchain sector in many ways.
Lack of Transparency
For one, the SEC’s approach has undermined innovation within the space. Many firms are unsure of the SEC’s next maneuvers in terms of classifications and enforcement. This opaqueness has caused startups to seek out friendlier shores to base their operations.
On top of the classification woes, the SEC has been involved in a number of high-profile ICO cases which has further exasperated the situation. Many of these companies that the SEC pursued are now forced to return all investor funds, and pay hefty fines for their crowdfunding events. In some instances, these fines are almost equivalent to the total amount raised during the company’s funding round.
Commissioner Peirce believes that the securities laws are not a good fit for this fast-paced digital revolution. Furthermore, she expressed concerns that applying these laws to new technologies such as blockchain tech results in a detrimental mismatch. Consequently, this heavy-handed and stiff approach to the market only hurts the US economic interests in the long run.
Safe Harbor Proposal – A New Era
Commissioner Peirce proposes a new legal standard to apply towards blockchain-based projects. The Safe Harbor Proposal would create a safety window in which all tokens are able to operate and crowdfund without the looming threat of SEC retribution for the sale of unauthorized securities. During this “Safety Zone” period, tokens would function as SAFTs.
Once a token passes the safety zone time period, the project will then be put to the infamous Howey Test to see if the project qualifies as a security. At this point in the project’s lifecycle, the SEC would then make a determination on the classification of the token moving forward. In this way, the SEC can get a firm grasp on the level of decentralization the project possesses and other important aspects used in the determination of a token’s classification.
Safe Harbor – Important Details
In order for a company to qualify for Safe Harbor status, it would need to adhere to a number of stringent guidelines. For one, the company must prove that it put forth good faith in terms of creating a functioning platform. Additionally, the firm will need to show that the network created operates in a truly decentralized manner.
All companies seeking Safe Harbor status will also need to provide disclosures on a publicly available website. Here, firms will need to accurately describe their identities and experience in the space. Also, in-depth details regarding the project must be shown. These details include details about the platform’s functionality, specifics about the tokens capabilities and technical stats, the intended use of the proceeds, and the source code for the project, if available.
Liquidity is Important
All Safe Harbor-qualified projects must create liquidity in the market. This liquidity needs to come in a couple of different forms. Specifically, developers must allow purchasers the opportunity to sell their tokens to a third party. As such, the Safe Harbor Proposal envisions a number of compliant exchanges specifically set up for this task. Companies will need to provide their investors with a way to offer and sell their tokens via these compliant exchanges.
Importantly, any firms looking to take advantage of the ruling will need to submit a Notice of reliance with the SEC within 15 days of the first sale of their token. Also, the firms will need to provide proof that the funds raised did indeed go towards the development of the network in question.
SEC Cracking Down
As previously reported, the SEC continues to seek out and prosecute ICOs hosted over the last two years. In most instances, these firms violated the current securities laws. In these scenarios, the firms face charges of illegally selling unregistered securities. Additionally, the SEC started to crack down on firms for falsifying or deliberately manipulating their investor data.
Recently, the SEC alleged that the founders of the Opporty platform violated securities laws. In response, the firm’s founder Sergii “Sergey” Grybniak released an open letter to the crypto community in which he details why he feels his firm is being unfairly chosen as an example to the market. In the letter, Grybniak claims that the SEC statements against his firm exclude important facts and overstates other instances.
All About the Benjamins
Grybniak also believes his firm was targeted because of its medium size. In the letter, he states that his firm was chosen because it had a “relatively small ICO with fewer funds available for legal fees for an extended court case.” Now Grybniak seeks to present his evidence and set a precedent in the sector via his trial.
Comprehensive Approach to the Market
Commissioner Peirce has put forth a very comprehensive and well-thought-out approach to the blockchain sector. The utilization of an SEC safe harbor grace period is exactly what the market needs to continue on its path of large scale adoption. The Safe Harbor Proposal could help to spur a new blockchain revolution on US soil. In turn, the US could regain its lost positioning as the world’s blockchain epicenter.
For now, the entire US blockchain market continues to grapple with outdated regulations and confused lawmakers. Hopefully, Commissioner Price’s new approach will re-light the fires of innovation on US soil.
Copper to Securitize Custom Indices with ‘Catalyst’
Over the past few years, one thing has been made clear within digital securities. This would be a need to develop services which ‘bridge the gap’ between tradition markets, and those of the future. Simply creating new services and offerings will not, necessarily, spur adoption. Rather, by providing an easy transition for those already enveloped in financial markets, seems to be a more prudent path to follow.
With this in mind, Copper has announced the creation, and launch, of a new service, dubbed ‘Copper Catalyst’.
Simply put, Copper describes Catalyst as providing the ability to ‘enable crypto funds to create and issue securities on digital assets rapidly, and cost-effectively’.
What does it do? And How?
Catalyst allows for institutional investors to gain access/exposure to cryptocurrencies – all while removing the need for self-storage. This is done through the use of actively-managed certificates (AMCs). As a result, by using AMCs, Copper is enabling cryptocurrency indices to be treated as clearable securities.
Bringing even greater appeal to Catalyst, is the use of Swiss ISINs – meaning the securities will be fully bankable (easily converted to cash). As a result, access will be provided through various regulated European exchanges.
To date, Catalyst is the only service of its kind. Depending on its success, there will surely be competitors that arise in the future.
ISIN is short for ‘International Securities Identification Number’. These numbers are attached to specific issuances of stock, and provide information on the underlying product.
Think of an ISIN as being similar to a VIN (Vehicle Identification Number) on your automobile. When decoded, a VIN will provide information, such as date of manufacturing, options, and etcetera. Similarly, when decoded, an ISIN will provide information, such as a stock identifier, issuance country, etc.
An ISIN is used primarily to identify the underlying product, reducing the risk of various forms of fraud.
Beyond offering the various capabilities discussed above, Copper notes another major draw towards Catalyst – cost savings.
They attribute this cost savings, primarily, to the ‘initial and on-going regulatory compliance’. By offering various services, surrounding KYC/AML, trade management, and more, Copper surmises that clients will save, both, time and money. For example, they provide the following comparisons between utilizing the Catalyst suite vs. independent sourcing of services.
- Completion in days
- Completion in months
Upon announcing the launch of Catalyst, Copper CEO, Dmitry Tokarev, took the time to comment. He states,
“The crypto fund industry has shown enormously promising growth over the last decade, with impressive strategies and excellent return for investors. But it is no secret that there has been a clear barrier to their graduation into the investment mainstream: the lack of feasible securitisation options. With sky-high costs and extensive compliance issues associated with most available structures, there is a gulf between traditional financial markets and this next generation of funds: a gulf that Copper Catalyst will bridge.”
With the launch of Catalyst, Copper now has a well-rounded suite of services. The following are just a few examples.
As this product suite rounds in to form, Copper has the potential to become a leader in a sector rife with potential.
The development, and launch, of Catalyst is a promising sign. It shows that Copper is not squandering their recently completed Series A.
We recently covered the success of this funding round, as Copper was able to generate $8M in investments through a variety of companies. To learn more about this round, and those that participated, make sure to peruse the following article.
Founded in 2018, Copper maintains headquarters in London, UK. Above all, the team at Copper is working to develop a comprehensive suite of services, tailored towards digital assets.
CEO, Dmitry Tokarev, currently oversees company operations.
While their services have expanded well beyond simply that of custody, this is certainly an area of speciality for the company. Over the past year, we have touched on various instances of adoption, including that of SWARM, as they turned to Copper to custody security tokens.
Blockchain Capital’s BCAP Token Outperforms Market in Q2, 2020
Today they announced that the net asset value (“NAV”) of each BCAP token as of June 30th, 2020, is $4.47, based on the NAV of the underlying venture capital fund, Blockchain Capital III Digital Liquid Venture Fund, LP. Weekly NAV updates can be found at: http://www.loop.blockchain.capital/
The BCAP NAV finished up 25.6% for the second quarter of 2020. The Q2 increase was driven by the liquid/token portion of the fund’s portfolio. The NAV is up 22.8% year-to-date.
The BCAP portfolio is up 347.0% since inception, post-STO from April 2017, and has a Net IRR of 59.0%. Performance figures are net of all fees and estimated carry.
The composition of the portfolio as of June 30th, 2020 is as follows:
While there are plenty of traditional cryptocurrencies in the portfolio, some special companies to note are Securitize and Harbor which are heavily involved in the digital securities and security tokens space.
About Blockchain Capital
Blockchain Capital was founded in 2013 with the mission of helping entrepreneurs build world-class companies and projects based on blockchain technology – providing founders with the tools they need to succeed: capital, domain expertise, partnerships, recruiting and strategy.
Blockchain Capital is one of the earliest and most active venture investors in the blockchain industry and has financed 90+ companies and projects since its inception. The company invests in both equity and tokens and is a multi-stage investor. Blockchain Capital also pioneered the world’s first ever tokenized investment fund and by extension the blockchain industry’s very first security token, the BCAP, which the company sold through a security token offering in April of 2017.
The company’s view is that blockchain technology holds the promise to disrupt legacy businesses and create whole new markets and business models. Blockchain Capital believes its network of entrepreneurs, investors and advisors brings unrivaled resources to founders who want to leverage blockchain technology to change the world in profound ways.
Real-World Assets as Collateral for DeFi, Made Possible with MakerDAO
The cryptocurrency space was borne out of a desire to bring about a better financial system and infrastructure that is inclusive for anyone, anywhere.
The crypto industry has matured significantly since 2010 when Bitcoin kicked off a new wave that today spawned a whole new industry. The crypto community continually progressed with new tools and capabilities being gradually built up.
Nonetheless these capabilities that promise quicker settlement times, trustless global accessibility and granular asset control have mostly remained gated within the crypto realm.
Bringing Together Real-World and Crypto Assets
Now, the ambition is to bridge the gap between real-world assets and cryptocurrencies. Specifically in the DeFi space, that aims to provide a borderless financing infrastructure, the first steps are being made to bring real-world assets as collateral for loan issuance.
The community of MakerDAO, that is behind the DAI stablecoin, arguably one of the most popular DeFi projects, has confirmed the vote on whether to allow real-world assets to be included as collateral options.
This comes following the effort led by the startup Centrifuge, that developed a protocol that lets users turn real assets into securities against which ERC20 tokens can be issued. This enables real world asset securitization as these tokens are interest-bearing and will be issued as NFTs (Non-Fungible Tokens).
DeFi applications built mostly on top of the Ethereum blockchain promise to give more people access to borrowing, lending, and other services because they eliminate the need to go and transact through a financial institution.
In the case of MakerDAO, the system built with Maker (MKR) and DAI lets users deposit cryptocurrency-denominated collateral to take out loans denominated in the U.S. dollar-pegged stablecoin DAI.
While recently the DeFi space celebrated a huge milestone with $1 billion locked in various applications across the board, participation in DeFi today is limited because it requires that users have purely crypto-native assets.
Getting real-world assets involved in the DeFi industry is what Centrifuge is pursuing with its Ethereum Dapp called Tinlake. The app allows for the securitization of real-world assets and have these represented on the blockchain as tokens, which can in turn be used to gain access to DeFi services.
What is Asset Tokentization?
Asset tokenization refers to the act of turning the ownership of a real-world asset into a digital token. This can be done in various ways, but all result in the legally-upheld bridge between the physical asset and its representative token.
Deeds, titles, and certificates are all traditional versions of a token. A deed to a house represents ownership of that house. The token refers to the digitally native asset which represents the real-world asset itself.
The first two types of assets that are available for tokenization are music streaming royalties enabled by PaperChain and ConsolFreight’s freight shipping invoices.
With the positive vote from the MakerDAO community, now anyone – be it individuals or companies – is able to utilize future cash flows from music streaming royalties or shipping invoices as collateral to take out loans for example.
Centrifuge’s Lucas Vogelsang notes the partnership could be the world’s first application of DeFi to a real-world business issue. Particularly, the solution helps ensure quick liquidity for artists and supply chain firms, without the hassles of going through traditional ways of financing.
MakerDAO’s Rune Christensen has also shared a highly optimistic vision as the two proposals represent the first step towards the expansion of DeFi’s field of application:
“These should be seen as the first two [RWAs] in the greatest portfolio of assets that’s ever been built. It’s just the first step. Thousands and thousands of assets will exist alongside them.”
There are still issues and restrictions when it comes to securitization of real-world assets and introduces new risks to the DeFi space.
For instance, Centrifuge’s tokenization process through its app still falls under the securities law. Since both Paperchain and ConsolFreight are based in the U.S. only accredited investors will have access to these assets.
Another compromise that was made in order to bring real-world assets to DeFi is Centrifuge setting up a special purpose vehicle (SPV) that will have the assets associated with, from a legal touchpoint. Lenders, in the event of default, would have to rely on the legal system to enforce their rights to the collateral, rather than an automated smart contract that can do so with on-chain assets.
While this is necessary to have a claim for the tokenized real-world assets, it represents a single-point of failure. But this is a trade-off that Centrifuge’s Lucas Vogelsang says is necessary in order to bring real world assets on-chain.