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Regulation

SEC Fines BCOT $250,000 + $13 Million Return

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BCOT Reaches SEC Settlement

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.

BCOT Settlement

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.

Enforcement

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.

Blockchain of Things via Twitter - BCOT

Blockchain of Things via Twitter – BCOT

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.

Repay investors

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.

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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

Digital Securities

Digital Securities About to Go Mainstream with Germany’s New Draft Law

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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.

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Regulation

Traditional Banks Ramp Up Custodial Services for Digital Assets

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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.

Who’s Involved?

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.”

It continued,

“…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.”

Bank Adoption

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.

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Regulation

Commissioner Hester Peirce Awarded 2nd Term at SEC

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peirce

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.

Senate Approval

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.”

Telegram, 2020

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.”

Big Plans

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.

New Leadership?

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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