No, Not All ICOs Are Securities
Paul Paray is an attorney in Allendale, New Jersey, focused on privacy and technology matters.
In his Feb. 8 opinion piece for CoinDesk, Santander’s Julio Faura suggests that “utility tokens are a bad idea” because it would be a “lie to ourselves” to suggest initial coin offerings (ICOs) were not actually selling securities.
Rather, in Faura’s opinion “we should collectively work on a framework to build a clearly defined scheme for ICOs, recognizing from the very beginning that they are securities.” And, this “ICO process should be designed in collaboration with regulators to comply with securities law.”
Faura’s opinion piece does not exist in a vacuum. In a report dated Feb. 5, Goldman Sachs’ global head of investment research suggests that investors in ICOs could possibly lose their entire investments – which ties to Faura’s underlying premise that ICOs should be regulated “to protect investors.”
It is not clear how his proposed hybrid solution would ever get implemented, given it requires complete buy-in from capital markets and regulators, so it would be a non-starter from day one.
Why would existing financial institutions and regulators scuttle existing methods of raising capital or attempt to squeeze ICOs under traditional securities law, even if considered a sale of securities?
Answer: They would not. Ripple – a company partially funded by Santander InnoVentures – offers a glimpse of how traditional banks and financial markets will compete using blockchain technology and “coins.”
Faura’s opinion piece paints all ICOs with the same brush by claiming each one of them actually offers securities subject to U.S. Securities and Exchange Commission (SEC) scrutiny. That is simply not the case.
Indeed, does Faura wonder why the SEC has not knocked on Ripple’s XRP “digital asset” door? Even though there was no formal ICO to launch that arguably centralized token, it now trades on 18 exchanges where individuals can buy the XRP coin. Indeed, after raising nearly $94 million of venture capital, Ripple probably does not need an ICO.
One ICO left untouched by the SEC was “gate-keeped” by the law firm of Perkins Coie and involved the sale of a utility token that raised $35 million in under a minute’s time. Brave’s token creates a digital advertising ecosystem tied to consumer attention – which is why it is dubbed the Basic Attention Token. Such an ecosystem would certainly be an upgrade from the current digital advertising scheme wedded to the web ecosystem of 1995.
All told, it seems that the SEC and other regulatory bodies have actually taken a very measured approach in this area – aggressively focusing on obvious fraudsters first in order to deter subsequent fraudsters, while letting the technology play out a bit in the wild.
Not surprisingly, the plaintiff’s bar has been doing a good job picking up the slack in those instances when the SEC has not yet moved. See Davy v. Paragon Coin, Inc., et al., Case No. 18-cv-00671 (N.D. Cal. January 30, 2018) and Paige v. Bitconnect Intern. PLC, et al., Case No. 3:18-CV-58-JHM (W.D. Ky. January 29, 2018).
Recent indicators seem to back this interpretation of the SEC’s ICO position.
On February 6, SEC chairman Jay Clayton acknowledged before the Senate Banking Committee that the potential derived from blockchain was “very significant.” His co-witness, Commodity Futures Trading Commission chairman Christopher Giancarlo, went so far as to say there was “enormous potential” that “seems extraordinary” for blockchain-based businesses.
Yet, during his testimony, Chairman Clayton said the SEC would continue to “crack down hard” on fraud and manipulation involving ICOs offering an unregistered security. This is consistent with prior messaging given that Chairman Clayton requested on December 11 that the SEC’s Enforcement Division “vigorously” enforce and recommend action against ICOs that may be in violation of the federal securities laws.
Chairman Clayton said the SEC was “working the beat hard” to crack down on ICOs, but chose not to answer a question posed of him by Senator Mark Warner of Virginia, namely whether the SEC will “go back” and scrutinize earlier ICOs.
In other words, there may be some ICOs, like the one for BAT, that the SEC will not attack, notwithstanding Clayton’s comment in the hearing that “every ICO I’ve seen is a security.”
The prospect that some 2017 ICOs raising hundreds of millions of dollars will not be addressed by the SEC provides a clear “nudge wink” that not all ICOs come under SEC regulatory control.
As with XRP and BAT, in the future, there will likely be many more tokens built on disruptive blockchain initiatives that escape SEC scrutiny given they are not perceived as securities.
The fact that the SEC has not yet moved on them – despite moving against Munchee, Inc. weeks after the Munchee MUN offering – signals the SEC will temper its enforcement activities when faced with a disruptive blockchain initiative that begets true intrinsic value.
In other words, utility tokens may be a good idea after all.
Umbrellas image via Shutterstock
Written by CoinDesk.com
Indians Look to Buy Bitcoin Overseas as Regulations Tighten
The Indian government has recently intensified its efforts to strengthen the country’s regulations on cryptocurrencies, promising that a regulatory framework for them will be announced soon. Earlier this month, the Indian tax authority issued noticesto 100,000 crypto traders asking them to pay taxes.
The Blockchain and Cryptocurrency Committee (BACC), an industry group whose members include 7 cryptocurrency exchanges, is considering several initiatives, such as creating a database of crypto users and transactions, to comply with the government’s mandates. The Times of India elaborated:
With Indian exchanges like Unocoin, Zebpay, Coinsecure, keen on increasing regulation and scrutiny into transactions, bitcoin aficionados say buying from US exchanges is a more popular alternative for purchases.
As regulations tighten in India, bitcoin “enthusiasts are now tapping into their own NRI [non-resident Indian] network of friends and family members,” the news outlet added.
L R Dinesh is a bitcoiner who buys expensive items using bitcoin on overseas online sites. He told the publication, “For the online tech community, there are some who receive bitcoins as payment for gadget and video game reviews. But for regular purchases, one has to get a relative or friend with an overseas account to send over bitcoins.”
Dana L Coe, the CEO of bitcoin hardware wallet Bitlox, believes that one of the main attractions of bitcoin is privacy, the news outlet conveyed.
He explained, “If you are purchasing a particular medicine and someone collects the data and sells it to a pharmaceutical company — these companies can use sets of such demographic information to increase prices.” Furthermore, he noted, “Differential pricing, blanket invasion of privacy cannot happen if one uses anonymous and private payments,” adding:
People would want to shield their payments from the government, corporates or even their own families. With big data and consumer tracking websites, the need for privacy is heightened.
The advanced security on purchases made with bitcoin is another major incentive for Indians, the publication added. “The requirement of Aadhaar is a dampener,” Dinesh asserted, referring to the 12-digit unique identity number issued to all Indian residents based on their biometric and demographic data. “The community of techies, bloggers and geeks are quite antipathic to the continuous stem of leaks and insecurities reported with Aadhaar,” he emphasized, noting that “To try and unite bitcoins with compliance is going to keep real bitcoin miners away from Indian exchanges.”
Damodharan Sampathkumar of Renovite Technologies was quoted:
In India, RBI has mandated two-factor authentication for all online transactions. But outside of India, only single-factor authentication is required. So when it comes to using one’s credit or debit card to buy products on overseas sites one also runs the risk of compromising sensitive financial data and hacks. So using bitcoins would add one layer of security.
Written by Bitcoin.com
PC Giant Lenovo Seeks Blockchain Validation Patent
A new Lenovo patent filing suggests that the Chinese technology giant could look to using blockchain as part of system for verifying the validity of physical documents.
In an application released by the U.S. Patent and Trademark Office (USPTO) last Thursday, Lenovo describes a set-up that utilizes digital signatures encoded in physical documents, which can be processed by computers and other machines, to verify the legitimacy of a document. The application was first submitted in August 2016, public records show.
The processing machine decodes the signature and translates it into a digital “map” of the document, which can then be compared to the physical copy at hand. The application says that the digital signature represents a “security block chain,” with a series of digital signatures representing blocks in the security chain. Lenovo clarifies that its “security blockchain” “refers to a distributed database that maintains a continuously growing list of data records secured from tampering and revision.”
It goes on to say that every block contains “information about the physical document at various points in time.”
Lenovo writes of its product:
“Using the security blockchain, anyone can validate that they have the current authentic physical document even if multiple paper copies exist and multiple people have made entries in the chain of modification. If any forgeries exist, they will show up as orphaned blocks in the chain. To validate a paper copy, a user of the electronic device takes a picture of the printed code on the physical document.”
Lenovo claims that the benefit of the product is that all parties holding copies of a given document can ensure that they “are each viewing an accurate copy” at any given time, eliminating the possibility that the text of the document was substantially altered after an “ink pen” signature was applied to it.
This is not Lenovo’s first experiment with the blockchain. Last year, Forbes reported that IBM had started working with the company on a blockchain-based invoicing system. At the time, the report suggested that the arrangement was aimed at making the billing and operational data processes more traceable and transparent.
Lenovo website image via Shutterstock
Cryptocurrencies ‘could drop to near-zero at any time,’ Ethereum founder warns
Cryptocurrencies are a nascent asset class and could fall violently at any time, the founder of blockchain network Ethereum warned on Saturday.
“Reminder: cryptocurrencies are still a new and hyper-volatile asset class, and could drop to near-zero at any time,” Vitalik Buterin said on Twitter. “Don’t put in more money than you can afford to lose.”
Buterin added: “If you’re trying to figure out where to store your life savings, traditional assets are still your safest bet.”
Cryptocurrencies have recovered slightly from a severe sell-off which saw the market lose as much as $100 billion in market value in a single day. Bitcoin recovered to a price above $10,000 last week after falling as low as $5,947.40 the week before.
In December, the Ethereum creator compared wild investment in the cryptocurrency market to the record sum paid for the world’s most expensive painting, Leonardo Da Vinci’s “Salvator Mundi.”
Ethereum is a blockchain network; blockchain is the technology that underpins cryptocurrencies. It maintains a continuously growing record of cryptocurrency transactions across a decentralized network. The digital token of the Ethereum network is called ether, but it is also often referred to as ethereum.
Twitter crypto scammers
Buterin is one of many popular figures who has been impersonated on Twitter by scammers promoting questionable cryptocurrency offers. These accounts often ask users to send an amount of cryptocurrency in exchange for a larger amount.
The Ethereum co-founder warned users not to trust people offering cryptocurrency on Twitter.
Other high-profile figures including Tesla CEO Elon Musk and even the chairman of the Commodity Futures Trading Commission, J. Christopher Giancarlo, have been impersonated on Twitter by such scammers.
Written by CNBC.com