This month, the United States Securities and Exchange Commission (SEC) announced that it had achieved a settlement with the startup Blockchain of Things Inc – BCOT. As part of the settlement, the firm agreed to a number of stipulations including a penalty payment of $250,000 for conducting an unregistered initial coin offering (ICO). The news follows a string of SEC targeted ICOs from 2017.
News of the settlement first emerged on Dec. 18 via an SEC press release. In the release, the SEC explained the decision to settle with the New York-based firm. Additionally, the post explained the stipulations in more detail. For example, BCOT must cease and desist from any actions that can be deemed outside the current securities laws.
As part of the settlement, BCOT must return the $13 million in raised funds to investors that request a refund. Sadly, this could be a hefty request as the firm’s tokens are not on any exchanges currently. Additionally, the firm will need to document and catalog these investors to file periodic reports with the Commission.
Speaking on the enforcement actions, Associate Director of the SEC’s Division of Enforcement, Carolyn M. Welshhans explained that BCOT failed to register its ICO in accordance with federal securities laws. Also, the company didn’t qualify for an exemption from the necessary registration requirements.
Welshhans stated that the SEC carefully considered the appropriate punishments to remedy the situation. In the end, the determination was made that BCOT would provide investors with compensation and required information if requested. Importantly, the SEC decided that the firm could host more offerings in the future, but would need to do so in complete compliance.
Also, the SEC requires BCOT to cease and desist from committing any violation of the registration provisions of the federal securities laws. Plus, the firm agreed to pay a $250,000 penalty for its actions. Importantly, BCOT assumed these fines without the need to admit guilt to the findings.
The BCOT ICO
BCOT raised $13 million during its 2017 unregistered ICO. The funding was to go towards the development and implement a blockchain-based platform for Dapps. The platform is specifically designed for third-party developers to build applications on. Currently, the platform has projects underway that included message transmission, digital asset generation, and digital asset transfer.
While the SEC crackdown appears to be in full swing, there is another trend that emerged recently. As of lately, firms ordered to repay investors have been closing their doors or skipping deadlines prior to the repayment. Already this month, multiple SEC charged firms choose to shut down operations rather than refund investors. Hopefully, BCOT doesn’t attempt the same strategy that sadly, leaves investors in the dirt. To date, the company called the SEC decision as “favorable.”
Hard Decisions Ahead
Moving forward the BCOT team has some hard decisions to make. Considering that their token isn’t on any exchanges, there is a very good chance you can expect a landslide of investors requesting refunds. Will BCOT have the funds to cover these requests? Only time will tell.
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.
Qatar Bans All Cryptocurrency in QFC
In a surprising turn of events, The Qatar Financial Centre (QFC) announced that it would ban all cryptocurrency-related activities within the sector. The news comes as a shock as Qatar has was seen as a leader in terms of blockchain adoption in the region. Now, government officials are voicing concerns over money laundering and terrorist financing as a means to stifle local crypto activities.
News of the crypto ban came via a report by the Qatar Financial Centre Regulatory Authority (QFCRA). In the now-infamous report, the QFCRA stated that all services involving cryptocurrencies are now illegal within the exclusive economic zone. Specifically listed in the report are critical components to the market. These components include crypto to crypto trades and crypto to fiat exchanges. Also, the report directly lists virtual asset services including those that facilitate the trading, custody, and issuance of virtual assets in any form or manner.
Security Tokens Safe
Interestingly, the report doesn’t ban security tokens. In fact, these unique financial instruments remain unaffected by the new legislation. The report states that financial instruments regulated by the QFCRA, the Qatar Central Bank, or the Qatar Financial Markets Authority are exempt from the ban. This makes sense from Qatar’s standpoint because these tokens undergo full AML and KYC verification.
Discussing the decision, Sheikh Abdulla bin Saoud Al-Thani, the governor of Qatar’s Central Bank pointed to a few key points as to why the regulations make sense. He stated that a correlated effort needed to be put forth to combat money laundering and terrorist financing. He believes that only a stricter and effective regulatory and legislative framework can accomplish this task.
It appears as if this latest maneuver is actually just a part of Qatar’s overall new approach towards combating money laundering. Recently, the country instituted wide-sweeping AML legislation. All of these laws seek to curb those attempting to hide money from the government.
The Qatar Financial Centre – QFC
The QFC is a special jurisdiction within the country designed to spur economic growth. Companies that call the QFC home get access to a host of exclusive benefits. These benefits include reduced legal, business, tax, and regulatory infrastructure. In this way, Qatar seeks to attract businesses and facilitate economic development moving forward.
Tighter Regulations Globally
Qatar’s decision to add more regulations to the crypto sector mirrors that of numerous other countries. Just recently, US lawmakers proposed new legislation to bring much of the crypto market under the jurisdiction of regulators. If the new bills receive approval, there would be wide-sweeping implications for the industry.
Additionally, EU Lawmakers have come up with new legislation as well. On January 10th, 2020, the European Union (EU) will initiate the Fifth Anti-Money Laundering Directive (5AMLD). This new law requires that all digital asset platforms and even wallet providers verify and record customer identities.
Qatar Steps Backwards
As Qatar attempts to gain more control over the use and trading of digital assets within its border, it may find that these new regulations have an adverse effect. Cryptocurrencies, many of which are designed to function anonymously, are not so easily regulated and monitored. For now, Qatar will see exactly what it takes to police the digital realm as they start the enforcement of their new crypto legislation.
Ripple XRP Under Increased Scrutiny as a Security
Troubles for the Popular cryptocurrency XRP and its foundation Ripple continue to mount up. Recently, new evidence emerged which could place the group under increased scrutiny. A document, now making it’s away around the internet appears to show that Ripple, the company behind XRP, used the token to increase its wealth. Now, regulators want to take another look at the XRP project to determine if it is in fact, a security.
On Aug. 5, 2019, a group of investors filed a complaint against Ripple with the SEC. The report claims to provide concise evidence that Ripple used the XRP token to garnish huge profits. The report claims that the company currently is engaged in selling these tokens in excess of the need for profit.
Ripple XRP Securities?
If these allegations are found to be true, Ripple could see prosecution. Officials may want to prosecute under the sales of unregistered securities via the U.S. Securities and Exchange Commission’s laws. Specifically, the report claims that Ripple violated numerous securities laws in the state of California. The data put forth in the suit suggests that the company utilized the XRP brand to enrich themselves significantly.
The lawsuit points to a blurring of the lines between Ripple’s enterprise solutions and XRP. Notably, the report revealed that the firm holds the majority of the total supply of XRP. The company utilized its stake as a form of profit generation in a couple of key ways. For one, Ripple actively limited the supply of XRP to increase demand. Additionally, Ripple paid exchanges to list XRP with the intent of increasing its value
Ripple Holds the Majority of XRP
To grasp just how this strategy unfolded, you need to understand that Ripple is the largest holder of XRP. Notably, the firm will be for the foreseeable future. Consequently, just a one-cent increase in the price of XRP equals around $600 million in profit gained for the company.
Discussing these concerns, William Hinman, Director of the Division of Corporation Finance of the SEC made his case for the labeling of XRP as a security. He explained that whenever you have a third party that drives the expectation of a return, you are usually dealing with a security. These firms use the token to increase the value of the enterprise.
Hinman stated that the firm raised funds “in excess of what may be needed to establish a functional network.” For its part, Ripple stated that these funds went towards enhancing the functionality of the token’s ecosystem.
To put those gains into perspective, you don’t need to look any further than Co-founder Jed McCaleb. While McCaleb is no longer with the firm, he sells half a million XRP on a daily basis according to Bloomberg. Notably, other company officials engaged in this type of activity as well. However, in a recent interview, Ripple CEO, Brad Garlinghouse, adamantly denied that Ripple has any control over the price of XRP. He pointed to the losses incurred over 2019 as proof. Last year, Ripple slumped nearly 60 -percent from $0.51 to around $0.20.
XRP – What Tomorrow Holds
As one of the most popular platforms in the crypto space, XRP continues to see growing adoption. If the SEC were to label XRP a security it could have serious ramifications for those involved in the project. For now, investors continue to wait and see how the SEC’s strategy plays out.
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