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Regulation

SEC Experts – Framework for Investment Contract Analysis of Digital Assets

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SEC Issues Framework for Investment Contract Analysis of Digital Assets

Amid a flurry of calls for more clarity within the cryptospace, two leading SEC crypto experts released a document this week called the Framework for Investment Contract Analysis of Digital Assets. The document isn’t an official SEC regulation.  Rather, the guide helps investors and companies determine the classification of a particular token.

Token Classification

A token’s classification determines what regulations, including taxation, it falls under. Token classification concerns have risen sharply since the SEC began targeting ICOs at the start of 2018. Over the last two years, multiple companies allegedly sold unlicensed securities according to the SEC. These companies now face fines and possible jail time. Also, the SEC requires that these firms return all raised funds to investors.

SEC Intervention

One such example of the SEC’s recent interventions is the Paragon Coin sagaParagon Coin saga. In this case, Paragon allegedly sold securities without a license. Additionally, the promoters of the now defunct project, which include the famous rap artist The Game and a former Miss Iowa, Jessica VerSteeg, now face SEC charges for their participation.

In at least one instance, a company was spared the wrath of the SEC for self-registering their ICO before the SEC stepped in.  Gladius Network Llc avoided hefty fines and potential jail time by “taking steps to rectify the situation” according to SEC officials. In the end, investors received refunds and no charges were filed. Now, the SEC hopes that the Framework for Investment Contract Analysis of Digital Assets can alleviate any future confusion.

Gladius Network Avoids SEC Fines

Gladius Network Avoids SEC Fines

The Howie Test

The SEC released statements in the past regarding token classification. In most instances, the Howie Test is the SEC’s main recommendation. While this information helped investors, many requested a more concrete explanation of the evaluation process. In other words, investors seek a classification model that includes blockchain terminology.

More Clarity

Recognizing the need for more clarity, two SEC agents released the Framework for Investment Contract Analysis of Digital Assets. These agents consisted of the Director of the SEC’s Division of Corporation Finance, Bill Hinman and Senior Advisor for Digital Assets and Innovation, Valerie Szczepanik.

Both of these individuals are very familiar with the crypto space, with the latter dubbed – the Crypto Czar by her co-workers. These individuals took note that applying the 71-year old Howie Test to the new digital economy is difficult. This reasoning led these two crypto specialists to provide this in-depth framework.

Important Factors

Speaking on the document, Hinman explained how much of the Framework for Investment Contract Analysis of Digital Assets’ criteria focus on the instruments used to issue and utilize the tokens in question. He described how a tokens distribution plan, offer terms, and economic inducements are critical when determining if a token falls under security regulations.

Hinman also took a moment to describe how an interested party could find additional information at FinHUb. FinHub is also known as the Strategic Hub for Innovation and Financial Technology. Here investors can find information to verify if an ICO is actually a security token offering (STOs).

No More Sidelines

These latest maneuvers showcase the SECs determination to get more involved in the cryptospace. With the advent of security tokens, more businesses are open to the idea of hosting a blockchain-based crowdfunding campaign. The financial benefits are obvious and now that regulations are in place, you can expect to see the STO market expand significantly.

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David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com

Regulation

CFTC Labels Ether a Commodity

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Ether is 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.

Ether Creator Vitalik Buterin via Medium

Ether Creator Vitalik Buterin via Medium

Transformative Token

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.

Reverse Securities

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.

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Exchanges

SEC Seeks Input on ‘Boston Securities Token Exchange (BSTX)’ Proposal

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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.

Joint Filing

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.

Rule Change

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.

Boston Security Token Exchange (BTSX) Seeks SEC Rule Change

Commentary

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!

Interview Series – Saum Noursaheli, CEO of tZERO

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Regulation

Reggie Middleton Enters SEC Settlement Discussions – Veritaseum

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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.

SEC Report Against Reggie Middleton

SEC Report Against Reggie Middleton

SEC Acts

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.

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