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What is KYC?

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KYC refers to ‘know-your-client’ or ‘know-your-customer’.  KYC simply refers to a required database on investors by potential securities issuers.  This data includes everything from identification, to financial awareness, and more.  As the various forms of security tokens are simply digital representations of traditional securities, they are also subject to the same regulations, such as KYC.

Antoine Tardif is the CEO of BlockVentures.com, and has invested in over 50 blockchain projects. He is also the founder of Bitcoinlightning.com a news website focusing on the lightning network, and a founding partner of Securities.io

Regulation

Japanese Government Introduces New STO Regulations

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Japanese Regulators Amend STO Regulations

Japanese regulators officially launched their STO market via amendments to the country’s current securities regulations this week. The new crypto exchange-specific amendments add clarity to the market and introduce a number of important customer protections. As such, analysts predict that the Japanese crypto sector is about to experience rapid expansion.

According to new reports, the amendments will go into effect on May 1. Importantly the changes directly alter the Payment Services Act and the Financial Instruments and Exchange Act. The amendments introduced a variety of new measures ranging from new banking regulations and cold wallet requirements, all the way to, new legal terminology.

Storage Upgrades – STO Regulations

Specifically, the new amendments put new requirements on exchanges. For one, all exchanges must now keep in cold storage an amount equal or greater than the number of users’ funds held online. This regulation ensures that exchanges rely on cold storage whenever possible. Along the same line of thought, exchanges are no longer allowed to keep users’ funds and their funds together. Importantly, this regulation extends across both crypto and fiat reserves.

Financial Services Act via Wikipedia - STO Regulations

Financial Services Act via Wikipedia – STO Regulations

ICO and STO Amendments

Another important amendment added to the regulations is the legal definitions of initial coin offerings (ICOs) and security token offerings (STOs). For years, blockchain firms struggled to get regulators to clarify the exact differences in terms of regulations. Now, regulators have a clear cut understanding of what type of fundraising campaign is underway, and how to classify it.

Fighting Fake News – STO Regulations

Interestingly, the new amendments go after all forms of market manipulation. There are now stricter fines and punishments in place for spreading rumors or making false statements. This is an important addition as market manipulation is a real concern internationally. Japanese officials hope they can curb these nefarious actors and weed out bad sources of information.

As part of the new enforcement policies, the new regulations place cryptocurrency asset derivatives transactions under the FSA’s jurisdiction.  Additionally, there are some terminology changes. Moving forward, cryptoassets and not “cryptocurrencies” is the terminology regulators agreed on.

Importantly, a group of Japan’s top securities firms has been patiently waiting for these regulations to become official. The group includes Monex Group, Rakuten, and one of the largest financial institutions in the country, SBI. In March, the group publicly revealed plans to create a regulated security token exchange.

COVID-19 Delays

The group’s wish could have come sooner if the world wasn’t in the middle of the COVID-19 pandemic.  Unfortunately, the virus has wreaked havoc on the markets and caused multiple delays for regulators. Notably, Japan was even forced to postpone the 2020 Olympics.

Japan STO Market is Here

Despite the dreary state of the international markets, Japan seeks to be the blockchain capital of the region. This determination, coupled with regulators forward-looking stance, is sure to give the country an advantage over the competition. For now, you can expect to see progress as the Japanese STO market is officially active.

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Security Tokens

Lawsuits Goes After Some of the Largest Names in Crypto

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Lawsuits Goes After Some of the Largest Names in Crypto

In what appears to be a broad swipe at the crypto sector this week, multiple lawsuits filed with the Southern District of New York claim wrongdoing against a myriad of blockchain-based firms. The class-action lawsuits allege wrongdoing on the part of crypto heavyweights such as Binance, Block.one, BitMEX, KayDex, BProtocol, Status and TRON Foundation, just to name a few.

According to court documents, the latest suit lists three plaintiffs – Chase Williams, Alexander Clifford, and Eric Lee. Interestingly, Roche Freedman is the firm heading the lawsuit. You may recognize the name from their recent lawsuits against Bitfinex and Tether. Additionally, they led the cases against Craig Wright and Bitfinex in the past.

Crypto Lawsuits – Details

The new lawsuit lists eleven companies in violation of regulations. These companies span the entire crypto sector.  Tokens such as ELF, CVC, TRX, TOMO, SNT, and others are listed for their use of IEO and ICO models in the past. The suit claims these tokens are unregistered securities. As such, the token made agreements with exchanges in violation of Section 5 of the Exchange Act.

Section 5 via Cornell Law School

Section 5 via Cornell Law School

The violations also extend to the named exchanges. The lawsuit lists KuCoin, Block.one, Quantstamp, Civic, and Binance as exchanges who sold unregistered tokens. Plaintiffs argue that these exchanges didn’t possess the required broker-dealer license in the U.S. Importantly, the plaintiffs believe that the SEC clarified in the past that the listed tokens are securities.

The suit also lists several crypto stars specifically. For example, Changpeng Zhao (CEO Binance), Vinny Lingham (CEO Civic), Justin Sun (TRON), Brendan Blumer (Block.one) and Dan Larimer (EOS) are all named in the suit.

Serious Allegations

The allegations are not trivial, For example, the trio argues that tokens such as TRX deceived investors about their purpose and level of decentralization. The suit claims that the centralization was “not apparent at that time.” It was only after the passage of time that investors gained the necessary insight to determine this. The suit states that there was a clear delay before the “issuer’s intent, the process of management, and success in allowing decentralization to arise”  become apparent. In this way, the allegations state investors were “misled into believing that TRX was something other than security when it was a security.”

Taking on the Crypto Industry

This case appears to be an attack on some of the most important firms, exchanges, tokens, and people in the crypto sector. The large scope of allegations and the global nature of the case will cause delays along the way. Consequently, it could be a while before this trial makes its way to the courtroom.

Lawsuits for the Stars

It’s hard to imagine a scenario in which the plaintiffs win this case. They would need to establish numerous precedents during the trial. These new rulings could stifle innovation in the US blockchain sector for years to come. As such, you can expect to see a measured response to this lawsuit in the coming weeks.

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Regulation

XRP Ripple Lawsuit re-filed, but not as a Security?

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Ripple XRP Lawsuit

This week, news broke that an amended complaint against Ripple has been filed by XRP investors. This news is the latest development in a two-year class-action lawsuit brought against the firm. Interestingly, investors chose to amend this lawsuit in order to add protections in the case that XRP doesn’t fall under securities regulations.

Importantly, the amended suit includes former XRP investor Bradley Sostack as the lead plaintiff. In this go-around, the plaintiffs brought additional claims against Ripple and its CEO, Brad Garlinghouse for violation of California business law. The report alleges the company blurred the differences between its enterprise solutions and XRP to further drive demand in the market.

Hedge Your Bets

Originally, the lawsuit alleged that Ripple raised millions of dollars through the unregistered sales of XRP to US retail investors. Now, according to a court document filed on March 25, investors decided to attempt another approach. Perhaps, fearing that XRP could escape securities regulations, the new suit goes after the firm for violations of California business laws.

To this extent, the sixth claim for relief states that the firm participated in false advertising, while a seventh claim, further accuses the firm of unfair competition in violation of California regulations. Also, the claim states that Ripple reportedly limited the supply of XRP to drive price appreciation.

Garlinghouse Under Fire

Specifically, the allegations claim that Garlinghouse made numerous conflicting claims to investors. In multiple instances, he stated that he was holding XRP for long-term gains. However, researchers pointed out that these statements were false. Throughout 2017, Garlinghouse sold millions of XRP via cryptocurrency exchanges. In fact, a review of the XRP ledger indicates that Garlinghouse sold over 67 million XRP in 2017 alone. Additionally, on multiple occasions, he dumped his XRP within days of receiving it from Ripple.

XRP Ripple Lawsuit

XRP Ripple Lawsuit

SEC vs Ripple XRP

The lawsuit cites statements made from Ripple about XRP being a utility token essential for international payments. Additionally, the firm and CEO made statements in which they described the cryptocurrency sales are primarily to market makers. This last point could prove to be a major problem for Ripple as 60 percent of XRP is owned by Ripple, and until now, only saw use solely for fundraising efforts.

The Ripple XRP Saga

The XRP securities saga started when a group of disgruntled investors lodged a complaint with the SEC back in 2018. Since that time, the case has seen numerous amendments as both Ripple and the plaintiffs adjusted their strategies. Ripple hoped to get the case dismissed early on,  but U.S. District Judge Phyllis Hamilton in the Northern District of California ordered in February the suit could proceed to trial.

While the news did seem bleak for Ripple, at that time, Judge Hamilton also stated that the company did not violate California state law. Consequently, both the false advertising and personal liability against Ripple’s CEO Brad Garlinghouse were dropped in that instance.

Now, Ripple worries that the plaintiffs will utilize unlimited amendments to falter the XRP market. Given the new legal approach that the plaintiffs have taken to towards the company, there may be some validity to their concerns.

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