This week, lawmakers introduced potential legislation which could alter the classification of security tokens forever. The Token Taxonomy Act seeks to provide more clarity in the sector. If passed, security tokens would see exemptions from many of the current securities regulations. This legislation would allow security tokens to achieve their maximum potential in the market.
Token Taxonomy Act – V2
The Token Taxonomy Act first emerged last year, but due to house scheduling conflicts, lawmakers were unable to vote on the bill. This piece of legislation seeks to provide security token investors with more freedom in the market. In addition to exemption from many securities regulations, the bill would amend the Securities Act of 1933 and the Securities Exchange Act of 1940 to specifically acknowledge blockchain-based investments.
When you consider that these regulations were put in place long before the digital economy (or computers) existed, it makes sense that this legislation requires updating. The new act gives blockchain investments their own legislation, specific to the industry. Also, the amendments would affect the SEC’s jurisdiction over security tokens in general.
Token Taxonomy Sponsors
The bills original sponsors, Warren Davidson and Darren Soto, are no strangers to the cryptomarket. These representatives want to give investors the green light to further security token use and development in the US market. Speaking on the bill, Davidson explained how the bill could facilitate growth in the space. Also, he described how the legislation would position the US as one of the optimal countries for blockchain investments.
The updated language in this version of the bill includes many sought after specifications including strengthening consumer protections. The bill also includes clear token classifications to be used in the market. Token classification is a hot button issue in the market currently.
Token Classification Concerns
Investors and companies seek more clarification from lawmakers regarding the classification of token types. There are plenty of reasons for this desire. A token’s classification affects everything from taxation to the ability to transfer ownership. The Token Taxonomy Act allows security token investors more flexibility by accurately addressing these concerns.
Now that the SEC started cracking down on what they consider illegal securities, it’s more important than ever, for both companies and investors, to have a clear understanding of what type of token is in use. In the past, the SEC made statements in which the Howie Test was the main recommendation for determining a tokens classification.
More Clarity is on The Way
Considering that the Howie Test was developed in 1946, it’s no wonder that both lawmakers and investors want something more up-to-date as a reference. Recognizing this desire for a clearer alternative, two SEC officials released a classification guide this week called the Framework for Investment Contract Analysis of Digital Assets.
Token Taxonomy Act
Security tokens reshaped the blockchain space. For the first time in history, traditional investment firms can utilize blockchain crowdfunding techniques with regulatory protections in place. You can expect to see the Token Taxonomy Act gain traction as the market’s expansion continues.
Telegram Investors Ready to Take Refunds amid Covid-19 Pandemic
According to multiple sources, the number of major Telegram ICO investors ready to accept refunds has skyrocketed. Originally, investors wanted a 100% refund of their funds. Unfortunately, the Covid-19 epidemic has caused many to switch their stance over to settle at a fraction of the funds paid into the token.
One report listed 10 major investors in Telegram’s blockchain project as ready to take what they can get immediately. Importantly, the Telegram ICO raised $1.7 billion from a variety of international investors. Up until this week, investors seemed ready to battle for a full refund. Now, given the state of uncertainty all the markets face, investors revealed they are ok with a 72% refund. Notably, Telegram stated that 5- 7%% of the funds were already spent on the development process in the intervening months.
Not Enough to Appease Investors in a Bull Market
Notably, back in October 2019, the firm offered 77% of invested funds back as refunds for the project. At the time, investors chose to reject the offer and agreed to extend the deadline for issuing the tokens to April 2020. The market was strong and most investors revealed a desire to receive tokens over refunds. However, these tokens never issued.
Telegrams Difficulties Continue
Telegram’s problems arose from their record-breaking ICO. The crowdfunding campaign came under investigation by the U.S. Securities and Exchange Commission last year. Regulators claim that Telegram violated securities laws when it illegally sold securities. In addition to the legal issues, the platform promised to deliver GRAM token to initial buyers before November of 2019. Unfortunately, the SEC blocked the company from completing this task just two weeks before the scheduled launch.
SEC Files Injunction – Telegram
At that time, the SEC filed an emergency action to halt the launch of the TON blockchain and GRAM token. Shortly following this decision, regulators obtained a restraining order against the company. On top of the SEC infractions, a federal court in New York ruled against Telegram this week. The court found that issuing the Gram tokens would constitute a violation of securities laws. Specifically, a judge of the Southern District of New York instituted a preliminary injunction. This injunction claimed that Telegram failed to register its ICO. Consequently, the firm violated the registration provisions of the Securities Act of 1933.
Market Speaks on the Changes
Speaking on the new developments, Head of Russian digital currency investment firm Hash CIB, Yakov Barinsky explained how the attitude of most investors changed recently. He stated that investors accepted the new refund conditions after the market collapsed. Currently, the entire global economy is in a state of stagnation.
Telegram Faces Uphill Fight
The hugely-popular messaging app became a global leader in the sector through a combination of an easy-to-use interface and advanced features. Of these features, Telegram’s use of end-to-end encryption is best known. In the past, this feature received heavy government scrutiny as it prevented their surveillance efforts.
Today, Telegram finds itself in the middle of a hard-fought court battle and a global epidemic that halted economic activity across the board. Unfortunately for the TON blockchain project, this perfect storm could prove as a death blow to the firm’s blockchain aspirations. For now, Telegram seeks clarification on the rulings.
SEC Files Charges Against ex-Senator David Schmidt – Meta 1 Coin
This week, the Securities and Exchange Commission (SEC) continued its ICO crackdown campaign. This time regulators announced charges against former Republican Washington state senator David Schmidt and two other individuals for their roles in the 2018 Meta 1 Coin scam. The fraudulent ICO left investors out of millions. Now the SEC seeks retribution for those who lost.
The SEC filed its complaint in the Western District of Texas on March 16. Regulators also named two other people, Robert Dunlap and Nicole Bowdler in the scam. All individuals face charges for violating antifraud and securities regulations.
Discussing the charges, David Peavler, the SEC’s regional director at the Fort Worth Regional Office stated that these individuals went out of their way to fraud US investors. The regulator went as far as to state they made “audacious claims about the Meta 1 Coin.” He explained that the team said anything to promote the event that left thousands with losses. Lastly, Peavler took a moment to remind investors that they should always act skeptically towards promoters who claim that their investment can’t lose value, or that investors will receive huge returns for minimal participation.
The 2018 Meta 1 Coin ICO appeared to be a great opportunity for investors at first. Unfortunately, the developers behind the Meta 1 project had other plans. The group made numerous false and misleading statements. For example, the group promised investors returns of nearly 225,000 percent. On top of this outlandish claim, developers told investors the project was risk-free and would never lose value.
If all of these promises weren’t enough to get you to participate, Meta 1 had other strategies to employ. For example, Meta 1 promoters claimed an art collection valued at $1 billion backed the tokens. Also, the SEC pointed to instances when the group claimed deposits valued at $2 billion backed the tokens. Supposedly, a reputable accounting firm regularly audited these funds. Obviously, none of this was true.
Meta 1 Coins ICO
The Meta ICO raised just over $4.3 million from around 150 investors from across the globe. Unfortunately for Meta 1, many of these investors were from the US. As you would expect, complaints began to roll into the SEC last year after Meta 1 failed to distribute coins to investors.
SEC investigators revealed that Meta 1 spent the funds in question on personal items. Specifically, the proceeds were funneled to a Chicago-based fund, Pramana Capital. Additionally, an individual named Peter Shamoun received some of the ill-gotten funds. Regulators described how the fraudsters spent the funds on their lavish lifestyles. In one instance, in particular, one of the individuals purchased a $215,000 Ferrari.
Now the SEC is seeking civil penalties and permanent injunctions against Schmidt and the other two defendants. As part of the punishment, the SEC wants Meta 1 to cease-and-desist operations. Additionally, the company must refund all ICO investors. This refund includes any funds sent to Pramana Capital and Shamoun.
This story is another case of uninformed investors caught in the blockchain hype. Hopefully, the SEC is able to reunite these investors with their lost funds. For now, Shmidt and his companions face an uphill battle against the SEC in the coming months.
The COVID-19 Effect
At this point, there are nearly no industries and individuals remaining that have not been affected by COVID-19 in some shape or form. Between self-isolation measures, lost income due to business closures, and overall fear, many have a sense of unease due to these radical changes to everyday ways of life.
Today, we will take a brief look at a few ways digital securities, currency, and blockchain as a whole have been affected by the ongoing global pandemic.
DTC Suspends Paper Certificates
This first disruption relates directly to the trading of securities. The Depository Trust Company (DTC), has instructed all transfer agents, within the Unites States, that they are ceasing their efforts to process paper based securities.
The following is a list provided by the DTC in their notice, breaking down their suspension of services.
- All physical deposits
- Withdrawal & certificates on demand (COD)
- New York window (NYW)
- Envelop Settlement Services (ESS)
- Custody Reorg
- SBA Pooling
While moves such as this are necessary for keeping COVID at bay, they also shed light on a burgeoning technology being used to supplant traditional paper based securities – Security Tokens.
“The suspension of paper-based certificate handling by the DTCC has left the status of many trades in limbo. With rule exceptions for Transfer Agents now in place under SEC guidance, some paper-based transactions may not be processed for weeks if not months. Where does this leave the affected broker-dealers or investors? We do not know. However, we do know that digital or tokenized shares would not be affected, as they are not subject to a single point of failure mechanism like centralized office-based paper processing. This systemic failure at a time of great need for liquidity surely calls for new methods of ownership and trading for all sorts of assets.”
Hendricks continued, highlighting the need for implementing digital change, by stating,
“It’s time for issuers and investors, especially with respect to private assets, to effect digital transformation and improve the resiliency and response time of securities transactions. Only fully digital transfer agents like Vertalo are capable of this sort of step-function improvement.”
As a company serving the digital securities sector in a variety of ways, including that of a transfer agent, Vertalo has a unique, and direct, insight into the effects of COVID on related operations.
Homeland Security Denotes Blockchain Managers as a ‘Critical Service’
We’ll begin this section with an excerpt from a recently released statement by the U.S. Department of Homeland Security.
“If you work in a critical infrastructure industry, as defined by the Department of Homeland Security, such as healthcare services and pharmaceutical and food supply, you have a special responsibility to maintain your normal work schedule.”
One of the most promising applications of blockchain technology is within supply chains. Whether tracking the origin of diamonds, authenticity of designer goods, or agricultural products, these processes seem tailor built to benefit from blockchain.
This point is underscored by the recent inclusion of Blockchain Managers as a ‘Critical Service’, by Homeland Security. While use of blockchain may still be in its early stages, it is clear that it has already established itself as a pivotal tool for those involved, specifically in Food and Agricultural sectors. Beyond the efficiencies made possible through its use, blockchain based supply chains have the ability to accurately relay information on products, ranging from place of origin, manufacturing dates, travel routes, and more.
Recording, and gaining quick access to, this information can go a long way when screening products, and ensuring trade channels continue operating as intended.
Through use computational power garnered via a global distributed network, Folding@Home is doing their part to help expedite our understanding of COVID-19. While not explicitly using blockchain, the idea of utilizing a distributed network to achieve a goa, with new levels of speed and efficiency is a common theme. The distributed network utilized by Folding@Home is comprised of anyone that has a surplus in computational power.
- Idle laptops
- High-end desktops
- Crypto-currency ASIC devices
The list goes on. Cumulatively, it is believed that the Folding@Home network, built on these devices, has grown to control more computational power than most of the world’s supercomputers.
With regards to COVID-19, in particular, Folding@Home is directing much of their cumulative processing power to understand the structuring of the proteins found within the virus. By gaining this understanding, it is hoped that new treatments will be discovered.
— Greg Bowman (@drGregBowman) March 16, 2020
Recently, what the company has seen is a massive influx of contributors – specifically, from those already well-versed with blockchain and mining. This has resulted in the network attaining over 450 Petaflops of computational power. An example of this comes from crypto-mining specialists, CoreWeave. The company has taken a serious, and proactive, stance against COVID-19 by reallocating 6,000 high-end GPUs, typically utilized for mining, towards the Folding@Home network.
Needless to say, it is uplifting to see individuals and companies from around the world come together in an attempt to halt the spread of COVID-19.
Central Bank Digital Currency
While various nations around the world have announced their intent to develop, and issue, a central bank digital currency (CBDC), the United States have taken a more trepid approach. This, however, may change, as the advent of COVID-19 has forced many to rethink the merits of such an endeavour.
Beyond the oft-touted benefits behind a CBDC, a new benefit to recently come into view is the ability to limit the transmission of contagions. Physical money passes through countless hands, and environments, on a frequent basis. This very nature makes money a prime candidate for spreading illnesses.
China was the first to recognize this, and act on the fact by removing cash from circulation and either disinfecting or destroying it. Close on their heels was the United States, having implemented similar precautions. These precautions surround money specifically entering the country from high risk areas, such as Asia. Money that ‘fits the bill’, will undergo an extended holding period, allowing for the disinfecting of potentially contaminated bills.
In a world gripped by the effects of COVID-19, this is one time where the laundering of money is actually a good thing (in a literal sense of the word).
On a smaller scale, many have seen a sharp disruption in an ability to even use the cash that they do have. With money being one of the items most commonly transferred between people, countless businesses have ceased accepting it as a form of payment. Instead, many are relying soley on debit and credit networks – further underscoring a potential need for CBDCs.
Attention towards a U.S. CBDC has grown to the point that it is now being discussed in potential stimulus packages. While nothing concrete has managed to make it into any final drafts, there is clearly an intrigue surrounding the topic, with significant legwork being put into the potential structuring of such an asset.
A Path Forward
These are only a few ways in which COVID-19 has managed to disrupt the way we view blockchain, digital securities, and currencies. With the pandemic still on the upswing, we will surely come across new implementations as the weeks go on.
Necessity is the mother of invention, and we might just see blockchain based endeavours provide a path forward, in search of inventive solutions.
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