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.
CFTC Labels Ether 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.
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.
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.
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.
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.
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.
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!
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.
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.