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Why EU blacklisting the Cayman Islands matters for the STO industry – Thought Leaders

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Why EU blacklisting the Cayman Islands matters for the STO industry - Thought Leaders

On February 18th the European Union added the Cayman Islands to its tax haven blacklist. While this has not made the news in the security token industry, it has had major implications. Due to the strict demands of AML & KYC in many jurisdictions, regulators are focusing more resources on beneficial ownership, tax transparency, and enforcement.

For companies raising capital, the blacklisting means you should not take money from a Cayman fund if you’re a European issuer. In the EU, a lot of the investment in security tokens, real estate, and private equity comes from or through Cayman fund structures. Cayman is also where a large portion of American VC funds are domiciled.

The current tax haven blacklist also includes American Samoa, Fiji, Guam, Oman, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu, and Seychelles.

Any company taking funds from a Cayman domiciled fund, or working with a platform/issuer/bank in that market should be aware that being associated with a blacklisted country could create significant new risk exposure for your project, and possibly yourself. These changes are effective immediately. Until recently, most firms could fly under the radar but the EU is also rolling out a public registry of corporate ownership. This will not only make non-compliance much easier to spot but also increases the ability for regulators in the EU to investigate and enforce.

The regulation could impact people working at (including directors, officers, or significant shareholders) a company that received funding from a Cayman source after the blacklist date. Enforcement severity changes by country but can include criminal charges, company seizure, and known associates may end up on a variety of sanctions and watch lists. Not to mention the reputational damage.

This is a good example of why a good AML program does not only consist of face matching a document and pinging an API to name match a sanctions list – you are opening up your venture, and most likely yourself, to massive liability. Your legal and regulatory obligation is to take a risk based approach. What that looks like can change by country, transaction value, activity history, etc., so AML program needs to be dynamic, robust, and comprehensive enough to catch things like narrative sanctions.

For example: The most popular security token platforms today only use KYC for digital onboarding of natural persons – not corporate entities. However, when you look at the investors in their previous token issuances you can see that most of the funds are coming from corporate accounts, corporation owned wallets, but the on-chain transaction and KYC is done by an individual. These platforms are missing the technical capabilities to spot transactions coming through blacklisted jurisdictions such as Grand Cayman.

iComply recently helped a virtual asset exchange pass the audits needed to offer their users the ability to spend virtual assets, such as Bitcoin and Ethereum, with a Visa card. This process involved independent audits from Visa, their banks, and regulators – each wanted to see the client demonstrate how they would be able to identify these risks and fulfill the requirements of a whole web of regulations.

Now that they have passed the audit, they are first to market with a very compelling offer compared to their competition who still have months of development on their AML systems before their applications will go through. Using iComply to get ahead of the regulations has also put them ahead of their competition.

We can expect the same for the security token market. Token issuers need to pay close attention to their AML compliance – Telegram had to refund over $1B USD over AML, has spent millions in court with the SEC, and the OCC has not even started with them yet…after that, how many of their “not investors” will be ready to jump onto an investor class action lawsuit? We have already seen this with the recent OCC case against MYSB in New York, or with the SEC and AirFox in Boston.

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Matthew Unger is founder and CEO of iComply. After founding a $42M wealth management practice, Matthew exited by age 26 and co-founded a practice management platform for wealth managers which was acquired by Planswell in 2015. Matthew has studied blockchain, AI and Business Strategy at MIT and is a global expert in Security Token Compliance.

Regulation

Multiple Canadian Securities Regulators Warn Against Halifax & Associates

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Halifax & Associates – A Repeat Offender

A pair of Canadian regulatory bodies have now issued warnings to investors, regarding foreign companies selling illegal securities within the nation.

The first instance occurred in late March, when the Manitoba Securities Commission (MSC), brought the issue to light.  In their statement at the time, the MSC named Denmark based, Halifax & Associates, as defrauding Canadian investors.

Fast forward a mere two weeks, and the Nova Scotia Securities Commission (NSSC), has had to contend with the same issues.  Again, this prompted the regulatory body to issue warnings to prospective investors, as Halifax & Associates is not registered to offer securities within the province.

Money Lost

While the total number of investors – and the sums of money lost – is unknown, we do know that this is not an isolated occurrence.

The MSC specifically notes that a rural resident of the province was bilked out of more than $8000, while the NSSC notes that multiple investors were taken advantage of.

Proceed with Caution

Unfortunately, despite continued adoption among legitimate companies and investors, there continue to be select bad actors which utilize cryptocurrencies, such as Bitcoin.

In these particular scenarios, investors were advised to fund trading accounts with Bitcoin.  From here, Halifax & Associates would provide them with access to services subject to securities laws – something that the company is not registered to offer in the provinces.

The MSC provides the following points for investors to adhere, and proceed with cation.

  • promises of high returns with low risk,
  • pressure to invest quickly / limited time offers
  • secret or sans-serif”>‘insider’ information / exclusive offers
  • offers from complete strangers
  • unregistered salespeople and companies
  • inconsistent details / avoiding questions / no paper trail

Commentary

In their statement warning investors, Stephanie Atkinson, Acting Director of Enforcement at the NSSC, had the following to say.

“The internet can be a dangerous place to shop for investments…Always take the time to check registration and understand the risks and costs associated with your investments. Further, never give out personal information without verification of the legitimacy of operations. This is particularly important where the entity or individual is unknown. Becoming an informed investor is your best protection from falling victim to scams.”

In Other News

There will always be those that try and circumvent regulations.  We cannot paint the blockchain sector with a broad brush however, as there are many which adhere to rules and regulations.

In Canada, there are various regulatory bodies which do their best to provide safety to investors, while facilitating start-ups through exemptions.  With avenues existing which allow for potential exemptions, there is no valid reason to be offering unregistered securities.

For instance, a promising Canadian company has recently been awarded an exemption status, as they look to develop and grow.  The following article touches on an example of this.

DigiMax Designated ‘Exempt Market Dealer’ by OSC

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Regulation

Central Bank of South Korea to Host 22mth Pilot for Potential CBDC

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Accelerating

To date, various nations have not only noted the potential need for a CBDC in the future, but have actually embarked on pilot programs to develop them.  The most recent nation to accelerate this process, delving in to a pilot program, is South Korea.

In this recent announcement by The Bank of Korea (also the nation’s central bank), they begin by stating, ‘The need for the introduction of the central bank digital currency (CBDC) by the Bank of Korea will increase.’  It is this recognition that has clearly prompted them to look at the logistics surrounding the creation, dispersion, and usage of such a CBDC.

What Will it Look Like?

While the BOK states that they are looking into the feasibility of utilizing blockchain to underpin a CBDC, usage of this technology is not a given.

Furthermore, the pilot program is expected to look at more than simply the technical requirements behind such a feat.  This extended look includes possible legal hurdles, expected cooperation between other central banks, custody solutions, and more.

The pilot program is said to be structured as a 22 month process, with the following breakdown.

  • Defining CBDC design and functionality
    • 5 months
  • Technological requirements
    • 5 months
  • Business process analysis through external consultation
    • 4 months
  • CBDC construction and testing in controlled environment
    • 12 months

The BOK, notably, refers to Sweden and their CBDC, the e-Krona, with regards to the structuring of their pilot program.

CBDC

The acronym ‘CBDC’, refers to a ‘Central Bank Digital Currency’.  These currencies are digital representations of previously established FIAT – meaning government issued currency.

While their structuring may vary, most believe that CBDCs will be structured as blockchain based tokens; Primarily due to the technologies ability to encode fungibility, while providing easy and cost efficient value transfer.

While digital, because CBDCs are issued by government regulated entities, they would be subject to the same, or very similar, regulations and scrutiny as traditional paper currencies.

Similar Approach

If this approach being taken by The Bank of Korea sounds familiar, perhaps that it because The Bank of Canada has recently announced similar intentions.

The Bank of Canada Could Issue a Digital Currency in the Future

While there is no firm timetable for the launch of a potential digital dollar, development is in the works.  As the adage goes, ‘an ounce of prevention is worth a pound of cure’.  Clearly, this is a stance adopted by each of these central banks, as they look to be prepared for the eventual need of a CBDC.  When the time comes, and a cure is needed for ailing paper currencies, preventative measures will be ready on the sidelines.

The Bank of Korea (BOK)

The Bank of Korea acts as the central bank for South Korea.  Operations are situated in the capital, Seoul.

In operation since 1950, The Bank of Korea is currently spearheaded by Governor, Lee Ju-yeol

In Other News

Recently, we took a brief look at a few ways that COVID-19 is affecting blockchain based endeavours, to date.  One of these revolves around issues which plague paper currency, and the need to go digital.  Make sure to read the following article to learn more about the perks brought forth by CBDCs.

The COVID-19 Effect

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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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