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After Facebook, Will Global Ad Regulators Reject ICOs?


While crypto startups and ICO issuers worry about social media platforms cutting their ads, they could be missing an even more intimidating threat – regulators.

Crypto entrepreneurs reeled late last month after Facebook announced it would be banning “misleading or deceptive” ads about financial products and services, including bitcoin and ICOs. These stakeholders saw a crucial advertising avenue dry up, but according to some, the drought isn’t over yet.

“The regulators will look at advertisements put out by the company. That’s always something they’re going to look at,” said Johanna R. Collins-Wood, an associate at Pepper Hamilton and member of the law firm’s blockchain group.

Others agreed and voiced concern about the industry where you never have to look too far to find suspect advertisements.

Indeed, crypto advertising is a immensely popular Wild West of sorts, where all token sales, legitimate or otherwise, are all vying for attention. And all the issuers and entrepreneurs in the space are still grappling with just what kinds of claims they can make in their marketing.

If the industry doesn’t police itself, regulators are sure to come knocking.

Just recently even, on February 22, France’s stock market regulator, the L’Autorite Des Marches Financiers (AMF), released a statement about looking to curb advertising on cryptocurrency-tied derivatives.

And others may soon follow. According to Collins-Wood, some of the regulators that have already taken a more keen notice of the crypto industry as of late will certainly use advertising to build their cases.

For instance, the Securities and Exchange Commission (SEC) Commodity Futures Trading Commission (CFTC), which held a joint Senate hearing on cryptocurrency earlier this month, will look at whether companies have made fraudulent claims in their ads, she said, adding:

“If they’re looking to bring a case against a company, they will certainly review all the public statements that the company has made and that would obviously include advertisements.”

‘More blatant than others’

Above and beyond financial regulators looking at advertisements to build fraud cases, though, formal guidelines for ads and marketing are less clear at this point.

Many of the regulators that oversee false advertising claims have yet to announce any specific policies on the nascent industry.

“There are a lot of shades of false advertising and misleading advertising. Some are more blatant than others,” said Carl Johnston, a corporate securities lawyer at FisherBroyles LLP.

Case in point, last year, a crypto ad made the rounds on Facebook with a stolen logo from the New Zealand Herald newspaper and an image of the former New Zealand prime minister John Key with a fake quote claiming he invested in bitcoin.

And in Australia, the continent’s securities watchdog received more than 1,200 crypto scam complaints, with one complaint detailing how an exchange advertised that it was an existing Australian company to gain consumer’s trust.

Though, maybe the most mainstream example is that of Japanese exchange Coincheck, which ran a TV ad campaign touting, only to be hacked to the tune of $533 million shortly after.

Several industry observers have since accused Coincheck of downplaying its securityprotections and criticized for skimping on security spending in favor of lavish ads. Indeed, the CEO of SBI Holdings reportedly called the company “scum of scum” for the spending.

As these instances pique regulators interest to the industry as a whole, some believe advertising regulation is not far away, and looking to the regulations facing traditional companies is probably a good place to start for determining how those rules will be laid down.

“We certainly do have laws against false and misleading advertising,” Johnston said.

Quiet for now

Although Johnston didn’t have any insight into whether the Federal Trade Commision, the government agency charged with overseeing these complaints in the U.S. was active in this area yet.

He told CoinDesk:

“I follow pretty much everything about ICOs that I can and I haven’t seen the FTC’s name a lot.”

The FTC did not respond to requests for comment.

And advertising standards groups have yet to chime in on the subject also. New Zealand’s Advertising Standards Authority told CoinDesk it had not received any crypto-related ad complaints, and the UK’s ad standards body said they had received less than 10 cryptocurrency-related ad complaints so far.

A spokesperson from the UK Advertising Standards Authority continued, “And none have resulted in us finding grounds for an investigation.”

Although, the spokesperson did point to the Financial Conduct Authority (FCA) as the regulator in charge of financial ads, but when asked, the FCA said it has no position on crypto ads.

Speaking to the trend to make sure ICO tokens are compliant with securities guidelines, Collins-Wood said:

“Lawyers are telling clients to focus on offerings that are compliant with securities laws. When you do that, that actually opens up avenues for appropriate and compliant advertising and in many ways eliminates a lot of these issues.”

Effects on startups?

It seems like many are taking a wait-and-see approach.

For instance, even though Russia’s equivalent to Facebook, VK, banned crypto ads last year, the social media platform lifted the ban in August 2017, stating that the restrictions were removed “to open even more opportunities for the active development of the cryptocurrency market.”

With more than a million people on the social network following cryptocurrency communities, the company also said it would reject crypto ads that violated its rules by promoting unsupported guarantees.

No other social network has taken a similar position yet. A Twitter spokesperson said it had no comment on cryptocurrency advertising. And Google pointed to its existing policies on misleading ads, which it said would apply to cryptocurrency.

But even if social media platforms moved to tighten up their procedures, it might have minimal impact on the ecosystem.

According to Midori Kanemitsu, CFO of bitFlyer, which ran both a social media and television ad campaign, the Facebook ban had minimal effects.

“Our understanding is that our TV commercials have contributed to a large increase in users,” Kanemitsu said.

As such, bitFlyer remains cautious about the claims it makes in its advertising.

“We never advertise large returns, low risks, etc. like the advertising from other organizations. For our internal regulation, we look to existing self-regulatory agencies for other industries,” Kanemitsu said, adding:

“We are not legally restricted as to the contents of our ads, but we have constructed careful internal self-regulatory procedures that require us to avoid expressions that may be misleading, and we take ad review very seriously.”

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Coinbase Compelled by IRS to Provide 13,000 Customers’ Information


Coinbase Sends Out IRS Notice

“Received notice from Coinbase today,” Tweeted Andreas Antonopoulos, “that my account is one of the 13,000 that they will have to turn over to the IRS under the court order. Not surprised, I knew I would be in that group. In case you were wondering, I’ve filed & paid taxes for my bitcoin income, gains/losses.”


Coinbase users would be wise to check email spam folders. It could be the difference in a potential IRS audit or worse. On Friday, the San Francisco-based cryptocurrency exchange notified thousands of customers, some 13,000, in compliance with a court order to provide the IRS with “taxpayer ID, name, birth date, address, and historical transaction records for certain higher-transacting customers during the 2013-2015 period.” The subject line read, An important message from Coinbase.

The announcement stems from a rather valiant fight Coinbase mounted in response to a late 2016 summons from the United States tax arm, “demanding that Coinbase produce a wide range of records relating to approximately 500,000 Coinbase customers. Coinbase fought this summons in court in an effort to protect its customers, and the industry as a whole, from unwarranted intrusions from the government.”

Be Careful Out There

Indeed, one of the revelations to come out of that tussel was how few US crypto enthusiasts had even bothered to address the tax issue. There was also plenty of ambiguity in how the US government ultimately classified bitcoin in particular. Nary a day passed when a bureaucrat would fail to disparage the decentralized currency, denying its definition or value. That left more than a few bitcoiners with the feeling the IRS had bigger and more important fish to fry.

That was, of course, until crypto markets started their nonstop boom. Nothing quite changes government minds and hearts like wealth. Suddenly, this niche phenomenon was building rather large capitalization and complexity. As a result, Coinbase continues, “After a long process, the court issued an order that represents a partial, but still significant, victory for Coinbase and its customers: the order requires Coinbase to produce only certain limited categories of information from the accounts of approximately 13,000 customers.”

Coinbase’s weird month continues, as Visa and Worldpay were forced to clarify why duplicate transactions appeared on customer accounts. These are the kinds of user experiences that can permanently sour customers, and so the exchange was sure to have bolded and italicized, “This issue was not caused by Coinbase.” The same might be said for the tax issue, however the company did choose the centralized route as opposed to decentralized cryptocurrency exchanges and peer-to-peer arrangements.

There’s plenty of misinformation regarding tax preparation and what qualifies. Enthusiasts are encouraged not to be coy on the issue, especially if they’ve transacted publicly on centralized exchanges such as Coinbase and are US residents. Regardless of one’s opinion on the morality of tax, the IRS has courts and cops and cages on its side. Governments are shockingly fantastic at two things: mass murder and revenue collection. Google crypto tax preparation outfits, scour forums, and seek trusted advice. Avoid anyone or organization encouraging running afoul of tax law unless they’re willing to pay fines and occupy a jail cell on their advice.

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Georgia Lawmakers Propose Tax Amendment That Allows Bitcoin Payments


The State of Georgia May Allow Residents to Pay Taxes in Bitcoin

Georgia Lawmakers Propose Tax Amendment That Allows Bitcoin PaymentsTwo senators from the state of Georgia, Joshua McKoon and Michael Williams, have proposed a change to the Department of Revenue’s statutes for tax collection and licenses. The bill was submitted on February 21, and the goals are similar to recent blockchain-centric bills filed in the state of Arizona — GA SB464 would allow residents from Georgia to pay their tax obligations and licensure fees in bitcoin and other digital currencies.

“The commissioner shall accept as valid payment for taxes and license fees any cryptocurrency, including but not limited to bitcoin, that uses an electronic peer-to-peer system,” the text from GA SB464 reads.

The commissioner shall convert payments made in cryptocurrency to United States dollars at the prevailing rate within 24 hours of his or her receipt of such a payment and shall credit the payor’s account with such converted dollar amount.

Move Over Arizona, Georgia Wants to Be a Digital Currency Hotbed

Just recently reported on the state of Arizona initiating a tax proposal that also allows bitcoin payments. One of Arizona’s bills has already been passed by the Senate Finance Committee. Arizona Representative Jeff Weninger told the press, “Arizona is going to be the place to be for blockchain and digital currency technology in the future.”

The state of Georgia is following Arizona’s lead likely due to the region having a large digital currency community. Georgia is home to a variety cryptocurrency-based companies such as Bitpay, Bitfury, and over 100 BTMs (bitcoin teller machines). Moreover, the state’s capital and the most populous city now has a Bitcoin Embassy. If the bill passes, it will amend the Department of Revenue’s Code Section 48-2-32.

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Will Lightning Help or Hurt Bitcoin Privacy?


Faster, cheaper bitcoin transactions? Check. But at what cost?

For bitcoin users, many of whom were drawn to cryptocurrency for its promise of financial sovereignty, bitcoin is still synonymous with privacy. But the gap between the vision and the reality, in which user transactions today must be published to a globally distributed ledger, has long been one of the technology’s biggest points of controversy.

“Bitcoin is Twitter for your bank account. Everything is public to everyone,” Ian Miers, the co-founder of the privacy-centric cryptocurrency zcash, told CoinDesk.

Compounding matters, however, is that as bitcoin users get closer to gaining a whole new way to send transactions, powered by an innovation called the Lighting Network, concerns are spreading that privacy could degrade from its already imperfect state.

On the surface, the idea might seem promising – because Lightning payments occur “off-chain,” the information isn’t included in the blockchain that all nodes store.

But while there is no Lightning ledger so to speak, payments in the scheme are still broadcast across nodes within the network. Essentially, to ensure routing is always available, those using Lightning channels need to trust other network users to help relay transactions.

Conceptually, this means that participants within the system could pry on a transaction, or even potentially sell that information to governments or advertisers. This is a risk that’s worsened if the network becomes centralized into a “hub-and-spoke” type structure, where hubs are large, well-known and often-used entities.

“Lightning likely won’t improve privacy, it may make it much worse from an average consumer’s perspective,” Miers added.

And like many, more speculative concerns surrounding the upcoming tech, the risk to user privacy may not be obvious until the network is deployed – an uncertainty that, combined with a wave of efforts on behalf of Lightning developers to include privacy features, has led to mixed sentiments as to what the future of private bitcoin transactions might be.

According to privacy researcher Kristov Atlas, in a worst-case scenario, privacy attackers could “thrive” on hubs “vampirically feeding off” the data as he wrote in a blog post.

However, the upcoming Lightning release does have some privacy features embedded, and there’s reason to believe that developers are at least making advances on the problem.


To date, the most advanced privacy feature included within Lightning is called “onion routing,” and it’s part of the Basics of Lightning Technology (BOLT), a series of protocols that ensure the multiple iterations of Lightning can interoperate.

In onion routing, payments are passed through multiple channels, and only the minimum of information about that payment is exposed.

For instance, upon receiving an encrypted payment, a node can only know where that payment came from and to what node that payment should be relayed.

According to Olaoluwa Osuntokun, a leading figure in Lightning development who first suggested the scheme on the developer mailing list, the importance of this is that nodes can’t be selective when it comes to what payments they’re willing to take.

“Nodes shouldn’t be able to arbitrarily censor certain payments, or blacklist certain destinations within the channel graph,” Osuntokun explained.

Often compared to the Tor network for its use of onion routing, Lightning has occasionally been celebrated as a darknet for bitcoin payments – however, it’s comparatively untested, and could face some of the problems native to Tor as well.

“Similar to Tor, there exist known possibilities of timing leaks, and also unknown active attacks that may be viable,” Osuntokun said.

And according to some, there’s ways that onion-routing could be manipulated, leading to the loss of privacy, especially in an early Lightning network.

For example, the last node within a route, as well as whoever sent that payment, will know the transaction information, and theoretically, nodes could collude to break privacy, piecing together each layer of the payment in order to create a complete picture.

On top of this, there’s the risk of a “global adversary which is able to instantaneous monitor all channels on the network,” something that the current privacy protocol doesn’t address, Osuntokun continued.

Fixed identifiers

And there’s further defects to privacy on Lightning today as well.

For example, Lightning payments are currently given a fixed identifier that is repeated throughout the entire route. “This means that if an adversary has two non-contiguous nodes on the route, then they can trivially link a payment flow,” Osuntokun said.

That said, Osuntokun assured that there’s ways to correct this in future.

For example, if Schnorr signatures, a scaling method that works by aggregating public keys, are adopted into bitcoin, it could correct this issue in a “simple and attractive” way, Osuntokun said.

Plus, there’s other, “more heavy weight solutions” such as using zero-knowledge to encrypt payments. However, because this encryption device is heavy, it will “significantly increase the amount of data one needs to send in order to complete a payment,” Osuntokun said.

According to Osuntokun, the “lowest hanging fruit” is to obscure this payment identifier with random numbers as the payments pass through the network.

Hub and spoke

Even more speculative risks exist as well, but according to Miers, it’s all highly contingent on the structure that the Lightning network will take.

“Some people think the amount of money you need to lock up in a channel and the costs of running nodes will inevitably lead to centralization,” Miers said. “And then there’s clearly no privacy.”

Because onion routing works by passing payments through multiple nodes, in the case of a highly centralized network, active nodes could have perfect visibility of the payments.

However, Blocksteam engineer Christian Decker told CoinDesk that the development teams are  creating “counter measures” against this risk of centralization.

Programming the system to open channels at random, Lightning “tries to avoid having hubs that can observe traffic,” Decker explained, which has the added benefit of “strengthen[ing] the network as a whole against single points of failure.”

Decker said that this randomness could be extended to how routes are formed on the network, making payment paths less predictable but potentiality increasing fees.

Other researchers maintain the risk involved in maintaining a node with high throughput will stave off the formation of centralized hubs.

Miers concluded:

“We will see which one actually ends up happening.”

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