ICOs Iced: A 12-Month Freeze on US Token Trading May Just Be Beginning
“The market is being chilled.”
Issued by Mike Lempres, chief legal and risk officer at Coinbase, the statement captures the mood of the moment for crypto innovators in the U.S. as regulatory uncertainty and months of wanton market growth appear to be finally coming to a head.
Spurring the shift is that the SEC finally confirmed last week what had been long rumored, that it’s investigating companies and startups associated with initial coin offerings (ICOs). In response, entrepreneurs are largely surrendering on the idea new cryptocurrencies created and sold to investors could be considered so-called “utility tokens,” a term denoting a digital commodity meant to represent the share of a blockchain protocol.
Still, U.S. companies preparing to issue tokens as securities may not have an easier time reaching buyers. There’s no registered broker-dealer capable of trading security tokens in the U.S. yet. And as multiple founders pointed out to CoinDesk, as issuers shift to issuing these tokens under a Regulation D exemption, most are still under the 12-month lock-up required by the rules.
At the MIT Bitcoin Expo this weekend, the issue was on display in a panel that struck a sour note on the state of ICOs. There, Nick Ayton, CEO of blockchain funding platform Chainstarter, went so far as to predict U.S. regulators will view every token as a security.
“Most exchanges are listing coins that are securities, and our view is a large number of these exchanges are going to be closed,” he told the crowd.
Even a panel on regulation more generally saw talk of the concern, with former CFTC chair and MIT professor Gary Genseler indicating his belief action on exchanges could be ahead.
“I think it is without a doubt that numerous exchanges will have to seek exemptions under alternative trading system [rules] because many of the exchanges, not all, have tokens that are securities trading on them,” he explained.
But it’s not just existing exchanges, businesses seeking to fill the market need may be held up.
As Gensler and others have put forward, participants in this new market think they might know what’s forbidden, but no one can be sure until regulators address cryptocurrency more specifically.
Joshua Ashley Klayman, counsel at Morrison Foerster, told CoinDesk:
“People who want to comply and don’t want to do something wrong are left trying to find the rules.”
Death of utility tokens
Stepping back, the market disarray perhaps shouldn’t be surprising.
The SEC’s decree on a little-known ICO called Munchee in December should have landed like a bomb, but it has rather had a delayed reaction, its shockwave not really hitting the industry until rumors began circulating that the SEC had issued a wave of subpoenas earlier this month.
With Munchee, “what the federal regulators think of as a utility token and not a security token is so small, and the eye of the needle got even smaller,” Klayman explained.
For a while there, companies seemed to think that even if utility tokens couldn’t be sold to the general public, they could still be given away (in what’s usually called an airdrop). However, we recently reported on how that’s probably an SEC violation there, as well.
Earn.com has been facilitating airdrops of tokens to its pool of verified users, and, Dave Bean, of the company’s sales team, told CoinDesk that “geo-filtering has become a very popular feature” for issuers that want to avoid the U.S.
Other new issuers are just abandoning retail investors.
“I have perceived a trend in the market wherein legitimate projects seeking to issue a native token for functional networks are steering toward relying on the Reg D exemption within the U.S.,” Tekin Salimi, a project manager at Polychain Capital, told CoinDesk.
As reported, the rule requires purchasers to be accredited investors, which means they must have a minimum net worth of $1 million, or have earned $200,000 annually for the last two years.
That said, there have been plenty of market participants that never believed unregistered tokens could work under SEC laws, and have factored such options into their models. Long-time entrepreneurs have moved in, offering platforms built specifically with different regulatory regimes in mind, such as TokenSoft.
But it’s still hard to imagine how a product that, say, creates a tokenized VPN, one that both pays people for broadband and lets them buy it back with the same token, works if those tokens are securities.
Caitlin Long, an industry veteran who helped move legislation on utility tokens through the Wyoming legislature, has even asked whether federal securities rules could be applied in ways where they may harm the user experience of more popular projects to the point where they’re no longer even feasible.
For example, she raised the idea that, should utility tokens be outlawed entirely, users of filecoin, a distributed online storage system, might need to use a brokerage to hold the tokens they need just to back up files.
Liquidity and trading
But even if an exchange goes live, the final issue for ICO projects in the U.S. is liquidity.
The trouble is that there’s no unified place to trade tokens that’s registered with the SEC now. As several founders have pointed out, that doesn’t mean that trading is impossible, it’s just not as easy.
CoinDesk has reported on several forthcoming attempts to launch an ATS, including Templum and tZERO. An existing alternative trading platform has also recently launched the OpenFinance Network, with its token trading platform opening in April, a spokesperson said.
But no real trading is going on using these platforms yet, other than one security available in Templum’s private beta and the sale of Overstock shares on its platform.
Chris Pallotta, CEO and co-founder of Templum, told CoinDesk that he expects to open the platform up in a matter of months, however. With most security tokens still in their 12-month holding period, he said, “I think the timing will work out pretty nicely.”
Even if Templum were to go live soon though, it may find it doesn’t have much product for its order books, as it will take a while for tokens created in the boom to get through that holding period.
That’s also assuming there are no additional holdups, and if the ICO space has shown anything, that might be a big if.
As Lempres put it to members of Congress:
“If the U.S. does not provide a clear, thoughtful regulatory environment, the investment can move very quickly to other countries.”
Additional reporting by Pete Rizzo.
Frozen money via Shutterstock.
Written by CoinDesk.com
Bitmex Research: New Data Points to Noble Being Tether’s Primary Reserve Bank
Tether’s Primary Reserve Bank Found?
Bitmex Research has released an update today to its deep investigation into Tether from last month. It shows that newly released data from Puerto Rico supports the speculation that Noble International Bank could be Tether’s primary reserve bank and that the island is a major hub for cryptocurrency business.
The Commissioner of Financial Institutions of Puerto Rico just released aggregate financial-system data for 2017. Bank deposits in the International Financial Entities category, which includes Noble Bank, were $3.3 billion, up 248% in the quarter ended December 2017. Total assets in the category were $3.8 billion, up 161% in the quarter.
The researchers explain that this “extraordinary growth coincides with a large increase in value of cryptocurrency assets, which has likely resulted in large cash inflows into cryptocurrency-related banks. Over the same period, the value of Tether in issue has increased by 215% to $1.4 billion.” They thus conclude that: “This new data supports the thesis in our recent piece on Tether, in which we speculated that Noble Bank is Tether’s primary reserve bank.”
Noble International Bank
When it promoted itself to the FX and OTC industry, Noble Bank International (NBI) explained that: “The state-chartered bank, based in the US Territory of Puerto Rico, is regulated under US federal law. NBI is a non-fractional reserve bank. This means that NBI does not lend or re-hypothecate client assets; rather, assets are legally segregated in the name of the client and bankruptcy-remote, held at NBI’s global custodian, BNY Mellon.” If this is also true under the same entity that serves Tether, it would suggest the stablecoin has direct exposure to US regulators.
As Bitmex Research pointed out in their previous report, there is also anecdotal evidence for a possible link between the bank and the stablecoin. The founder and CEO of Noble, John Betts, was behind the 2014 Sunlot Holdings move to take over and potentially rescue MtGox. And Sunlot was backed by Brock Pierce, one of the founders of Tether.
A representative of the bank only had this to say to news.bitcoin.com today: “As a matter of company policy, Noble doesn’t disclose client information.”
Images courtesy of Shutterstock.
Written by Bitcoin.com
Israeli Crypto Companies Banned From Stock Exchange Indices
Israeli Cryptocurrency Companies Banned From Listing on Stock Exchange Indices
Israel’s financial regulator, the Israel Securities Authority (ISA), has announced that companies primarily operating in the cryptocurrency sector will not be included in stock exchange indices.
According to a rough translation, ISA Chairperson, Ms. Anat Gueta, stated “We decided to avoid exposure to passive investors for companies whose operations are mainly in [crypto]currencies,” adding “These are companies in which the investment is high risk, speculative and volatile.”
The ISA states that the determination has been made in response to “the exceptional trading in securities of companies on the Tel Aviv Stock Exchange who announced in recent months that they intend to operate in the cryptographic currency sector.” In some instances, the regulator asserts that just the announcement a company may be exploring blockchain technology “led to a sharp rise in share prices, even before they have true activity.”
ISA Seeks Amendment to Stock Exchange Regulation
The ISA has stated that it will “act to promote a temporary amendment to [Israel’s] stock exchange regulation, which will limit the entry into indices of companies whose main activity is the holding, investment, or mining of distributed cryptographic currencies.”
Israel’s financial regulator described the objective of the amendment as “prevent[ing] public companies operating in this risky and speculative field […] from entering the stock exchange indices and [being] included in the portfolios of passive investors.” The ISA hopes to introduce said amendment for “a limited period of one year,” after which the law “will be re-examined in accordance with developments in the market.”
The ISA has expressed concerns if it had not intervened, that the “combination of cryptographic and stock index companies would have let [to] mutual funds and ETFs […] acquire shares in these companies,” thus “indirectly expos[ing] passive investors to” the “potential for […] significant loss[es].”
Written by Bitcoin.com
Trump Orders New Sanctions Against Venezuela’s National Cryptocurrency
Donald Trump has signed an executive order imposing new sanctions against Venezuela for its controversial “petro” cryptocurrency.
The U.S. president was previously said to be preparing to sign an executive order imposing additional sanctions on the South American nation for its attempt to bypass existing economic restrictions, McClatchy DC reported on Friday. On Monday, Trump signed an order blocking any U.S. transactions in the petro, the White House announced.
The sanctions represent the most notable development to date since Venezuela launched the petro in February. As stated at the time by government officials, Venezuela is seeking to use the cryptocurrency as a way to circumvent international sanctions.
That the Trump administration would make such a move is perhaps unsurprising; several U.S. lawmakers have sharply criticized the petro, with Senators Bob Menendez, Marco Rubio – and, later, Bill Nelson – writing letters to the Treasury Department asking how it would protect American investors and prevent Venezuela from raising money.
The Treasury Department has yet to respond directly to the letters’ contents but did confirm that sanctions risks would apply to Americans purchasing the token. Menendez’s office later confirmed to CoinDesk that he was continuing to press the department for a response.
The controversial token has received pushback from within Venezuela’s borders as well. The nation’s Congress denounced it as “illegal” and unconstitutional.
And while Maduro has claimed to have already garnered as much as $5 billion through the token’s pre-sale, no evidence has yet been presented to back up this claim.