FinTech Adoption Sees 72% Increase from Coronavirus

Image courtesy of Emerging Europe.

By Tim Fries @ The Tokentist

New Problems Require New Solutions

An easy example is the sudden rise in people using communication platforms like Slack or Zoom. While these companies saw heavy use before, their use now is certainly much higher.

FinTech is one arena where the adoption of various technology platforms by the public has been progressing at a relatively steady rate, particularly compared to other tech offerings. But the Coronavirus may very well change all of that.

People are working from home more than ever before, including folks in the financial industry. Along a similar vein, more people are watching the stock market than few other times in human history, buying or selling or biting their nails in the anticipation of what’s to come.

Yet just because people are working from home doesn’t mean their jobs are necessarily over. Things still have to run, companies still need to meet, and traders still need to buy and sell stocks. All of these requirements are causing people to look for alternatives to their traditional meeting routines and solutions.

FinTech Adoption – An Expected Increase?

What exactly is FinTech? In a nutshell, FinTech is a shortening of the phrase “Financial Technology”, and it’s an umbrella term that refers to any technology platform or program designed to increase the delivery or accessibility of financial services to the public. Perhaps the simplest example of FinTech is the standard banking app. No longer do people need to visit a brick-and-mortar banking institution to view their funds, make a deposit, or even withdraw cash; it can all be done via your smartphone.

But FinTech development didn’t stop with this modern phenomenon. These days, FinTech is represented by many developments and advancements, including stock market applications, investment portfolio programs, AI investment advisors, money-transfer platforms, and much more. FinTech has been a result of the deluge of digital talent just like many other sectors, so it’s seen rapid innovation over the last 20 years.

What It Means for Today

Technological developments and leaps have led people to discover that they no longer need to physically meet someone to have an interview, just like they don’t need to go to the store to buy a book. Even before Coronavirus, people used technology to have web chat meetings or send documents to one another much faster than copying a physical document and sending it across an office.

But perhaps the most important advantage FinTech brings in the wake of social distancing is that it allows companies to maintain some semblance of “business as usual”. If you can have a business meeting with all of your coworkers through video chat conference software, send files to one another via collaborative platforms like Google Docs, and receive a paycheck and even update your investment portfolio using smartphone applications, are things really all that different?

Before the coronavirus, many people would not necessarily have been exposed to many FinTech platforms. But having to work without face-to-face interaction, and without coming into the office, is causing people to look at things in a new light. In a way, FinTech is more attractive than ever before.

Technological Positives

Because coronavirus is forcing everyone to work remotely, there’s a clear probability that FinTech usage will only rise in popularity because of its advantages.

For instance, FinTech (and other tech) allows people to communicate even if they are separated by vast distances. In the era of the coronavirus, you may not be physically separated from your coworkers by all that far, but it may as well be several hundred miles if you can’t go outside. Technology allows you to collaborate and communicate with other workers just as you would in the office either through web chat or video chat applications.

Technology is also useful thanks to its speed. You can now make instantaneous transactions regardless of distance and almost regardless of platform. Stock trading is no longer regulated only on the floor of the New York Stock Exchange. Now it can be affected by someone sitting on the couch with their smartphone in their palm.

FinTech Efficiency in Action

There are plenty of easy examples of how FinTech can benefit financial workers or just about anyone through their efficiency and user-friendliness.

Payments, Even Cross-Border

Applications and money transfer services like TransferWise are becoming used more and more even by those who aren’t particularly technologically literate. That’s because they allow you to quickly make payments across international borders and even involving different currencies thanks to storing your money in a digital wallet.

TransferWise and money transfer services like them allow anyone to start with American dollars and send European euros to loved ones abroad in a pinch. Traders or businesspeople can also maintain their transaction schedules using these services. Most of them come with fees, but there’s no denying the convenience and speed of these methods of money transfer. It definitely beats sending a check the conventional way!

Stock Market Investing

As mentioned before, the stock market is constantly being watched not only by regular brokers but by the public at large. Many are worried about their 401(k)s or other investments of the market reaches lows that haven’t been seen for quite some time.

But the market is also very reachable thanks to smartphone applications like Robinhood. Now, you can instantly buy or sell stocks with an app from the comfort of your home while in your pajamas. You can also use apps like Stash, which help you to smartly buy or sell stocks to support companies with causes or missions that you morally support.

Financial Guidance

AI isn’t just a fantasy when it comes to FinTech. These days, FinTech platforms and applications like Betterment can provide you with good-to-expert stock and investment advice. This prevents you from having to take a trip down to an actual firm or even make a phone call. Betterment, for example, will monitor investments and even take care of things like rebalancing or tax-loss harvesting.

While AI may not necessarily be the best tool for financially unstable times like we’re in now, many people are using these platforms to make tough decisions about their financial futures.

Retirement Account Assistance

Blooom is just one example of how FinTech is allowing people to manage their own retirement accounts with much more speed and agility than they could before. This is particularly important as people pay attention to stocks and try to maintain their accumulated wealth as the market falls.

FinTech Was Inevitable: Now It’s Here

According to research from Devere Group, the situation has — so far at least — resulted in a 72% spike in FinTech use across Europe.

The coronavirus will not singularly cause FinTech to rise. Like all automation and digital advancements, it was only a matter of time before FinTech became a standard series of applications and computerized tools utilized fully by the public. But it is becoming increasingly clear that the coronavirus is accelerating the adoption of FinTech. The benefits of the tools more workers are being forced to use now, from home, translate almost exactly to the benefits seen in FinTech.

In a way, the mass quarantines and shelters in place being enacted across the United States and beyond have given people plenty of time to rethink the way they do things. For some businesses, this is terrible news. But for advanced industries like FinTech, there are certainly some benefits.

SEC Chief Jay Clayton: We Are “Not Looking to Expand Securities Laws.”

Image courtesy of ThinkAdvisor.

Author: Tim Fries @ The Tokenist

The SEC refuted claims that it is “standing in the way of progress,” despite operating a clunky regulatory regime that is likely pushing many blockchain businesses away. In discussing security tokens recently, SEC Chief Jay Clayton told reporters that he does not plan to change the laws.

As Bloomberg reports:

“I think a lot of people got excited that somehow we would change the rules to accommodate the technology and they invested their time and effort thinking that would happen. I have been pretty clear from the start, that ain’t happening.”

Clayton did stress, however, that the SEC is ultimately ‘pro-business’ and is, by no means, against cryptocurrencies. However, he seems opposed to legal reform of any kind.

“If we have a way to reduce the cost of payments internationally through technology, I am all for it. But you can’t sacrifice basic principles of securities law, and other law, to allow it to happen.”

The SEC chief also said that Facebook’s Libra is on shaky footing and would likely need to be policed similar to an Exchange-traded Fund (ETF). Although avoiding commenting directly on the topic, he said that “if something looks like an ETF and operates like an ETF, the law says it should be regulated like an ETF.”

It seems that, for now, we shouldn’t expect the SEC to budge on its old ways when it comes to securities anytime soon.

SEC Commissioner Peirce Proposes Three-Year Grace Period for Token Sales

Image courtesy of CNBC.

Author: Tim Fries @ The Tokenist

SEC Commissioner Peirce’s Three-Year Safe Harbor Proposal for Token Sales

Hester Peirce has served as an SEC Commissioner for the past two years. During that time, she’s earned the nickname “CryptoMom” after showing strong support for digital assets and even voting to make the SEC’s definition of accredited investor more inclusive.

Now, Commissioner Peirce has added to that reputation by proposing a three-year safe harbor period for startups wishing to raise funds through a token sale. Speaking at the International Blockchain Congress, Peirce says initial token sales may sometimes require time in order to determine whether or not their underlying asset constitutes a security:

“The analysis of whether a token is offered or sold as a security is not static and does not strictly inhere to the digital asset.”

While a token sale might initially appear to equate to a securities offering, a project could become sufficiently decentralized over a period of time so as to not constitute a securities offering. Ethereum could be an example of what she means.

Back in 2014, Ethereum raised more than $18 million through its own Initial Coin Offering (ICO). Yet several years later, SEC Chairman Jay Clayton suggested he believes the network became sufficiently decentralized to not resemble a security.

If Peirce’s proposal eventually sees implementation, companies looking to raise funds through token offerings will still face a number of requirements. Issuers would need to draft public notices, code disclosures, personal disclosures, as well as additional paperwork.

Investor protection will still remain a priority. Peirce says,

“The safe harbor is also designed to protect token purchasers by requiring disclosures tailored to the needs of the purchasers and preserving the application of the anti-fraud provisions of the federal securities laws.”

Further Details on the Safe Harbor Proposal for Token Sales Explained

The proposal also features an ‘initial development team’, with the aim of overseeing a project’s growth. Specifically, this team will measure the “network maturity” of a project, to determine whether or not its network is likely to be controlled by a sole entity. Peirce adds,

“The definition of Network Maturity is intended to provide clarity as to when a token transaction should no longer be considered a security transaction but, as always, the analysis will require an evaluation of the particular facts and circumstances.”

The initial development team will then examine projects at the close of each three-year grace period. The teams will analyze whether or not the project’s token transactions do in fact constitute securities transactions. Surprisingly, Peirce says liquidity should be created for the tokens:

“Admittedly, the liquidity condition may surprise observers of SEC staff positions in which attempts to facilitate secondary trading have been viewed as indicia of a securities offering. In the context of the safe harbor, by contrast, secondary trading is recognized as necessary both to get tokens into the hands of people that will use them and offer developers and people who provide services on the network a way to exchange their tokens for fiat or cryptocurrency.”

She continued that a publicly accessible medium must be available, featuring each project’s token economics, transaction history, roadmap, source code, and a complete history of previous token sales.

The proposal by Commissioner Peirce seems to differ from the views of Chairman Clayton. For years, Clayton has suggested nearly every token sale he has seen, constitutes a securities offering. As a result, the digital asset industry has transitioned to the Security Token Offering (STO) as a viable alternative in the realm of blockchain-powered fundraising.

Digital Assets a 2020 Examination Priority for the SEC

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Author: Tim Fries at The Tokenist

The SEC’s 2020 Examination Priorities Explained

Every year the OCIE publishes examination priorities to remain transparent in its review process. The office aims to present potential risks to investors and show the areas it will examine throughout the coming year.

By no surprise, the office’s examination priorities for 2020 include digital assets. The marketplace for digital assets, says the report, has grown rapidly and “presents various risks”. The office said a primary risk includes retail investors who do not understand the difference between digital assets and traditional investment products.

As a result of such risks, the OCIE says it will continue to examine SEC-registered market participants who are active in the digital asset space. The following criteria will be under evaluation:

  1. Investment suitability
  2. Portfolio management and trading practices
  3. Safety of client funds and assets
  4. Pricing valuation
  5. Effectiveness of compliance programs and controls
  6. Supervision of employee outside business activities

Transfer Agents as an SEC 2020 Examination Priority

Another aspect of examination priority includes transfer agents. Such entities play a crucial role in the settlement of securities transactions — they maintain records for the issuers of securities, record ownership changes, cancel and issue certificates, distribute dividends, and facilitate communication between issuers and securityholders.

The security token industry made notable progress throughout 2019. A number of security token companies received transfer agent registration confirmations from the SEC. The list of companies includes Securitize, Harbor, TokenSoft, Vertalo, and Block Agent.

With regard to transfer agents, the office says it will examine the timely turnaround of items and transfers, recordkeeping and record retention, and the safeguard of funds and securities. Examination “candidates” will include those developing blockchain technology or who provide services related to digital assets, among others.

2020 was not the first year digital assets were featured as an examination priority. Cryptocurrencies were first mentioned in 2018 when the office discussed the need to examine whether or not service providers properly disclosed risks associated with their products. They also made it a priority to review the safeguarding of client assets.

In 2019, the OCIE said it would monitor portfolio management, internal controls, the safety of client funds, trading practices, pricing, and compliance. These same goals were echoed in 2020, with the addition of supervising employees outside of business activity.

A Year in Review: Security Token Development in 2019

Author: Tim Fries at The Tokenist

Global Security Token Highlights in 2019 Explained

Throughout 2019, security tokens continued to gain credibility from regulators, investors, and entities in the space. Developments took place in a number of jurisdictions across the globe.

At the beginning of the year, the UK’s Financial Conduct Authority (FCA) initiated a consultation to determine its boundaries in terms of regulating crypto-assets. Several months later, the FCA published final guidance saying security tokens do indeed fall under its regulatory scope.

The FCA went on to facilitate the UK’s security token ecosystem through its own regulatory sandboxes. These enabled several businesses to test the market in a controlled yet regulatory compliant environment.

Of these included TokenMarket’s Security Token Offering (STO) which raised £240,000 (158% of its goal) in just two weeks. There was also London-based 20|30 which issued more than £3 million worth of tokenized equity in collaboration with the London Stock Exchange (LSE).

In the United States — the world’s jurisdiction with more security token issuers, investors, and infrastructure providers than any other — a number of advancements took place. The state of Maryland passed a bill allowing blockchain technology to legally record stock issuance, transfer, and management. The U.S. Securities and Exchange Commission (SEC) approved two Reg A+ token offerings: Blockstack and the Props Project.

A number of US-based companies saw progress. Securitize, a technology provider for the issuance of security tokens, assisted with the on-chain tokenization of more than 10 assets. San Francisco-based security token platform Harbor announced the tokenization of $100 million worth of real estate funds.

In Germany, securities regulator BaFin approved a number of STOs, including those by Bitbond and Fundament. While Bitbond raised over €2.1 million, Fundament received regulatory approval to launch a real estate token with an issued volume of €250 million.

Asia also experienced a spike in security token activity. While Chinese regulators have maintained a firm stance against cryptocurrency activity, the Chinese government clearly sees benefits in the underlying technology. China issued almost $3 billion worth of bonds via blockchain and is reportedly developing a legal framework for STOs.

Based in Singapore, end-to-end security token platform iSTOX completed what it says is “the world’s first issuance, custody and trading of a regulated blockchain-based security on a single integrated platform”. San Francisco-based Securitize received a number of investments from entities in Japan, showing notable interest there as well.

Why Wasn’t 2019 the ‘Year of the Security Token’?

Despite global progress, security tokens did not see a year of mainstream adoption in 2019. A number of publicized deals failed to come to fruition.

Earlier this year, Harbor was set to tokenize a luxury student residence located in South Carolina. A few months after the initial announcement, the deal was called off. According to a Harbor spokesman, the cancellation was the result of a dispute with the deal’s mortgage lender. The spokesman told a media outlet,

“The issuer was unable to come to favorable terms with the existing mortgage lender. As a result, they decided not to move forward with the offering.”

In another case, Propellr and Fluidity announced the tokenization of a luxury condominium development in Manhattan back in late 2018. The deal was one of the first security token projects to feature notable mainstream media coverage.

Later, in 2019, the deal quietly fell through. Propellr CEO Todd Lippiatt cited a lack of institutional interest as a primary factor. Interest existed on the supply side, he said, but generally featured poor quality:

“I think at one point we had $3 billion worth of interest in tokenization. But once you started to sift through it all, there was a bunch of people who wanted to raise money for really bad deals.”

Demand Side Interest for Security Tokens

For the industry at large, demand side interest exists in part, but is typically — and controversially — limited to a select group of individuals: accredited investors. Bruce Fenton, the CEO of Watchdog Capital, recently noted the irony surrounding the criteria of an “accredited investor”, as it strictly involves wealth — with absolutely no consideration for education or professional experience. Fenton tweeted,

Accredited investor rules:
You CAN buy:
– state lotto tickets
– scratch cards
– you can bet your entire home equity in Vegas on a card game
– you can buy an iPhone on credit & smash it for social media
Things you CAN’T buy unless rich:
– interest in venture capital funds

The SEC is currently considering a change to its existing accredited investor definition which would make it more inclusive. During a recent vote, one commissioner — who supports the proposal — noted how even he himself fails to meet the criteria of an accredited investor. If the proposal is implemented, it would allow for new pools for eligible investors to participate in STOs.

Another trend could increase interest from the demand side: asset tokenization targeting consumer goods. Nike for example, recently filed a patent to tokenize shoe ownership.

Tokenization could be used to verify authenticity and ownership in resale markets where highly sought-after sneakers are bought and sold second-hand. If Nike — and other companies — push these concepts to market and see mainstream success, they would essentially be demonstrating the effectiveness of security tokens.

What is Needed for Security Token Adoption?

Ultimately, security token implementation is dependent on a number of factors. At least one of them includes demand for the tokenization of highly sought-after assets, whether those include traditional investments or consumer goods, such as a pair of Nike sneakers. Highly sought-after assets, in the context of security tokens, imply high-quality offerings — a factor from the supply side.

Yet here, a number of developments need to be in place. First of all, potential issuers need to understand the benefits security tokens can bring. This exemplifies the why, as in why are security tokens valuable. In 2019, we learned from the words of Propellr CEO Todd Lippiatt that institutional investors might not understand the why at this point.

Second, actors in the space need to know how they can bring security token services to the market, while investors need to know how they can invest. This involves two areas: the regulatory side of the house and UI/UX.

While this how is largely jurisdiction-specific, the U.S. SEC features significant influence as accredited investors in the U.S. are frequently a target during offerings. Even this remains a bit blurry however, as the SEC is considering a change to who is allowed to invest in a regulated securities offering.

When it comes to user interface and experience, most available tools require technical expertise which is far higher than the average user. There is surely room for improvements in this area.

One major point is clear: security tokens have arrived. While 2019 didn’t feature mainstream adoption, it did show one thing. The tokenization of traditional financial securities does bring practical value to economic transactions in the world — not just in theory.

History Suggests Patience

As technology evolves, the world and its economic infrastructure change with it. With the advent of blockchain technology, many anticipate a major change to the way traditional financial securities are issued, transferred, settled, and how those transactions are recorded. These changes require time, however. Just look at the internet: its first version, a military communication network dubbed ARPANet, went live in 1969.

Today, different variations of the internet — most notably the World Wide Web — have drastically changed the way some humans communicate and even purchase basic household items. These changes are continuously ongoing, with no signs of slowing down.

The world’s first blockchain, Bitcoin, went live on January 3rd, 2009. From a macro perspective, the blockchain space remains in a state of infancy. Yet people across the globe are becoming increasingly disposed to emerging technology. If the tech brings value — first and foremost — the demand will exist, resulting in some form of implementation in due time.

As more people become aware of why and how the tech brings value, expect to see an increase in security token adoption. Will that happen in 2020? Well, as with any significant worldly change, it probably won’t happen overnight. Progress was made in 2019 however. You should expect to see even more in 2020.

Cryptocurrency Act of 2020: Congressional Prep for Libra — or More?

Image courtesy of la Croix.

Author: Tim Fries at The Tokenist

U.S. Congress and Digital Asset Regulation in 2019

2019 has been a busy year for the U.S. government in terms of digital asset regulation. At the beginning of the year, Congressman Warren Davidson (R-OH) introduced the Token Taxonomy Act of 2019.

In the summer, Facebook revealed plans for its controversial digital asset Libra. Since its initial unveiling, Libra has been met with skepticism from regulators across the globe and even initial backers such as Mastercard and Visa.

Now, as the year comes to a close, a discussion draft has surfaced from U.S. lawmakers. The bill, referred to as the ‘Crypto-Currency Act of 2020’, was introduced by U.S. Representative Paul Gosar (R-AZ).

According to the draft, the bill’s purpose aims to attribute regulatory clarity regarding which federal agencies are responsible for the different types of digital assets. The corresponding agencies are then responsible for informing the public on the appropriate licenses, certifications, or registrations needed to issue or trade digital assets.

The Cryptocurrency Act of 2020 Explained

The bill identifies three different types of digital assets. Each type has a corresponding federal agency required to provide regulation.

The three different asset-types include crypto-currencies, crypto-commodities, and crypto-securities. The bill went on to identify three agencies as ‘Federal Digital Asset Regulators’. These include the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the Financial Crimes Enforcement Network (FinCEN).

Each agency will work as the sole authoritative government agency for one digital asset type: FinCEN will be responsible for crypto-currencies, the SEC crypto-securities, and the CFTC crypto-commodities. Though still a draft, the bill went on to identify basic responsibilities as well.

Every ‘Federal Digital Asset Regulator’ (also referred to as ‘Federal Crypto Regulators’) must maintain a public record of all licenses, certifications, and/or registrations that it requires to create, issue, or trade digital assets. In addition, FinCEN must work with the Secretary of the Treasury to create similar rules enforced by traditional financial institutions in order to trace cryptocurrency transactions.

What’s a Crypto-Commodity, Crypto-Currency, or Crypto-Security?

According to the bill, crypto-currencies include representations of United States currency or synthetic derivatives resting on a blockchain or decentralized cryptographic ledger. These include reserve-backed digital assets which are fully collateralized in a correspondent bank account, such as stablecoins. Crypto-currencies also encompass synthetic derivatives determined by decentralized oracles or smart contracts and collateralized by other crypto-currencies, crypto-commodities, or crypto-securities.

Crypto-commodities are defined as economic goods or services that markets treat with no regard for who produced the goods or services, feature full or substantial fungibility, and rest on a blockchain or decentralized cryptographic ledger.

Lastly, crypto-securities include all debt, equity, and derivative instruments that rest on a blockchain or decentralized cryptographic ledger. There’s one exception here, however.

A crypto-security does not include a synthetic derivative both operated and registered with the Department of the Treasury as a money services business and operates in compliance with the Bank Secrecy Act as well as additional anti-money laundering, anti-terrorism, and screening requirements of the Office of Foreign Assets Control and the Financial Crimes Enforcement Network.

The Cryptocurrency Act of 2020 and Facebook’s Libra

There is much speculation with regard to the reasoning behind the newly developing legislation. The most obvious reasoning is regulatory preparation for Facebook’s developing digital asset, Libra.

In November of 2019, a bipartisan group of U.S. Senators proposed a bill entitled ‘Management Stablecoins are Securities Act of 2019’. The legislation — yet to be approved — claims stablecoins, to include Libra, are securities. Under this scenario, Facebook’s digital asset would be deemed a security token, and subject to the corresponding regulations.

In another case, Representative Davidson — author of the Token Taxonomy Act of 2019 — has also said Libra should be regulated as a security. A former CFTC advisor has argued the forthcoming digital asset could be regulated as both a security and a commodity.

Ultimately, the verdict is yet to be revealed. What we can see however, rather clearly, is a push for clearer regulatory frameworks regarding the use of digital assets in the U.S. It should hardly be seen as a coincidence that the bulk of this push has come just after talks of Libra entered the scene.

Whether anything substantial comes to fruition — and precisely what that means for Libra and other digital assets — we’ll have to wait and see.

What You Need to Know: The SEC and its Potential Accredited Investor Definition Change

Image courtesy of Wealth Management.

Author: Tim Fries at The Tokenist

What is the SEC’s Definition of Accredited Investor?

Currently, the SEC acts as a gateway to a significant number of investments. Only investors which fall under the status of ‘accredited’ — according to the commission’s criteria — are allowed through the gate.

The initial purpose of defining such criteria was ‘investor protection’. For years however, people have questioned these criteria. Now, even the SEC itself is considering a change.

According to the active criteria, an individual accredited investor must have a net worth of more than $1 million (excluding a primary residence), $200,000 in annual income, or $300,000 in joint annual income. Accredited investor status is required to access private securities offerings, hedge funds, and private-equity funds. Institutions also have to meet certain requirements — they need to have more than $5 million in assets.

There is no consideration regarding an investor’s education, experience, or general knowledge. Because of this, the majority of industry participants see the definition as a poor metric used to protect investors. Afterall, the SEC is essentially saying that one’s wealth — and solely one’s wealth — is sufficient protection for certain investments. Everyone else is excluded.

Public markets feature strict guidelines regarding investment transparency. Private markets differ however, allowing for a larger degree of variation and less disclosure in terms of the information made publicly available. With the technology boom, private markets have boomed with it, as most rising tech firms tend to stay private for as long as they can.

This has subsequently restricted a significant number of investors from participating in a large number of offerings over the past three decades. Many people feel as though these offerings were of high-quality — yet an estimated 80% of Americans were deemed ineligible due to a lack of wealth, or rather, ‘accreditation’.

The SEC Changing its Definition of Accredited Investor Explained

Now, the SEC is considering an amendment to its definition. According to a public statement from the SEC, the proposal “seeks to update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in our private capital markets.”

According to SEC Chairman Jay Clayton,

“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth. Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication. I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”

If approved, the proposal would therefore create new categories of accredited investors based on criteria such as certifications, experience, education, and professional knowledge. More specifically, the SEC has proposed the following categories to qualify as accredited investors:

  • natural persons with certain professional certifications and designations, including a Series 7, 65, or 82 license, or other credentials issued by an accredited educational institution,
  • a ‘knowledgeable employee’ of a fund with respect to investments in a private fund,
  • limited liability companies, registered investment advisors, and rural business investment companies provided they meet certain criteria,
  • entities which own investments (per Rule 2a51-1(b) under the Investment Company Act) of more than $5 million which do not have the purpose of investing in the securities offered,
  • family offices managing a minimum of $5 million in assets and their family clients,
  • spousal equivalents, so they may pool finances together for the purpose of qualifying as accredited investors.

Not every commissioner was in support of the proposal, however. The three Republican Commissioners — Clayton, Peirce, and Roisman — voted in favor, while the two Democratic Commissioners — Jackson and Lee — voted in opposition.

Roisman pointed out how, surprising as it may be, he does not qualify as an accredited investor — along with many of the other SEC staff. Peirce said the existing definition is an “offensive concept lurking in our securities law”. As Americans we feature a certain equality, she says, and the government needs to secure these rights — not remove them.

Jackson opted for a more data driven approach. Both he and Lee touted the proposal as “overly inclusive”.

How will a Change to ‘Accredited Investor’ Impact Security Tokens?

The SEC has received significant criticism from the digital asset sector regarding its accreditation requirements. With the emergence of blockchain technology came the Initial Coin Offering (ICO), which was leveraged by hundreds of companies to raise billions of dollars.

Yet the ICO curtailed the majority of regulatory requirements that come with raising capital. SEC Chairman Jay Clayton has previously said himself that nearly every ICO he has seen constitutes a securities offering. Hardly any were compliant with such laws, however.

As a result, the ICO diminished. As quickly as it disappeared, a new kid arrived on the block: the Security Token Offering (STO). In differing from the ICO, the STO explicitly declares itself a securities offering, and therefore abides by the corresponding regs while also utilizing the benefits of blockchain technology.

Still however, many STOs — since they are compliant securities offerings — are confined to wealthy accredited investors. Changing the qualifications of an accredited investor could therefore significantly increase the demand side — both investor eligibility and participation — for STOs.

Reactions from the Digital Asset Space

Responses from the digital asset space were universally positive. Anthony Pompliano, founder and partner at Morgan Creek Digital Assets, tweeted,

“BREAKING: SEC Proposes to Update Accredited Investor Definition to Increase Access to Investments. This is a step in the right direction. We must stop discriminating against 80%+ of Americans based on wealth.”

Ami Ben-David, former co-founder of SPiCE VC — the first compliant security token to undergo a peer-to-peer transfer on a public blockchain — tweeted,

“Finally! this is great news, potentially transformative for the Digital Securities ecosystem. That’s what almost everyone in the ecosystem have been advocating for. It’s great to see that the SEC is taking action towards a more effective, fair and inclusive accreditation model.”

Bruce Fenton, security token advocate and founder of digital asset broker-dealer Watchdog Capital tweeted,

“I’m in favor of abolishing ALL accredited investor rules. They are antiquated, have little to no value in protecting the public & slow legitimate capital formation. People are able to buy state lotto tickets, they should be allowed to invest in the same investment as the rich.”

A public comment period will remain open for a period of 60 days. The SEC has invited those interested to submit a comment through its internet submission form, or via email to rule-comments@sec.gov.

FinCEN Releases New Guidance for US Cryptoassets Service Providers

Coinlaw.io By Mark Knowles

The US Financial Crimes Enforcement Network (FinCEN) recently published its new guidelines detailing how know-your-customer (KYC) and anti-money laundering (AML) laws apply to cryptoassets.

FinCEN’s “interpretive guidance” is chiefly aimed at reminding persons subject to the Bank Secrecy Act (BSA) how regulations relating to money services businesses apply to certain business models involving money transmission denominated in value that substitutes for currency, specifically, what it calls “convertible virtual currencies (CVCs)”.

The guidance document does not establish any new regulatory expectations or requirements. Rather, it consolidates current FinCEN regulations, and related administrative rulings and guidance issued since 2011, and then applies these rules and interpretations to other common business models involving CVCs engaging in the same underlying patterns of activity.

Accordingly, FinCEN classifies peer-to-peer (P2P) cryptocurrency trading platforms as money transmitters and requires them to conduct mandatory KYC checks and follow applicable AML laws. Unlicensed P2P cryptocurrency traders, and those who fail to follow FinCEN’s requirements, could face jail time.

“This guidance is intended to help financial institutions comply with their existing obligations under the BSA as they relate to current and emerging business models involving CVC by describing FinCEN’s existing regulatory approach to the issues most frequently raised by industry, law enforcement, and other regulatory bodies within this evolving financial environment,” states the introduction to FinCEN’s guidance document.

It goes on to caution all operators within the cryptoassets space to be aware of their regulatory compliance requirements under the Banking Services Act, whether their business model is directly addressed in the guidance or not.

“In this regard, it covers only certain business models and necessarily does not address every potential combination of facts and circumstances. Thus, a person working with a business model not specifically included in this guidance may still have BSA obligations,” it states.

The guidance is intended to outline FinCEN’s existing regulatory approach to current and emerging business models using patterns of activity involving CVCs.

“This approach illustrates how FinCEN fits existing interpretations about certain activities to other activities that at first may seem unrelated, but conform to the same combination of key facts and circumstances,” it states.

In effect, all cryptocurrency exchanges, cryptocurrency wallets providers, crypto mining pools and cloud miners, along with decentralized applications (dApps) developers and those that use them to carry out financial activities, have compliance requirements under the BSA.

US Senators: Facebook’s Libra, Stablecoins Are Securities Under Existing Law

Image courtesy of Fortune.

November 22, 2019 by Tim Fries at thetokenist.io

On November 21st 2019, a bipartisan group of US Senators proposed a new bill, titled the “Management Stablecoins are Securities Act of 2019”. If approved, the legislation would make ‘managed stablecoins’ — to include Libra — securities, and subject to a number of additional regulatory hurdles.

The New US Legislation Claiming Libra is a Security Explained

Yesterday, Representatives Sylvia Garcia (D-TEX) and Lance Gooden (R-TEX) proposed a new bill which would officially declare both Libra and other ‘managed stablecoins’ securities. While introducing the bill, Garcia explicitly called out Libra, claiming it and other Stablecoins “are clearly securities under existing law”. Both Garcia and Gooden are members of the House Financial Services Committee.

An overwhelming majority of digital assets feature a clouded regulatory status — at least in the eyes of consumers. It’s precisely this type of regulatory clarity that the bill aims to bring to purchasers of such financial instruments. According to Gooden,

“In what are called ‘managed stablecoins’, we have trusted brands marketing digital assets to consumers as secure and stable. Everyday investors need to know they can trust the issuers behind their financial assets. This bill would bring them the security they deserve by applying the laws we use to regulate financial securities to this new breed of digital currencies.”

Garcia also argues that regulatory clarity will only help in protecting consumers who use these types of digital assets. She says,

“Bringing clarity to the regulatory structure of these digital assets protects consumers and ensures proper government oversight going forward.”

Is Facebook’s Libra a Security Token?

Regulators around the globe have been notably hesitant to support the development of Libra. US Lawmakers have expressed growing concerns over Libra’s ability to rival the US dollar and ultimately, the US economy. Even G7 — an intergovernmental organization comprised of seven of the world’s leading economies — has produced reports highlighting the risks that assets such as Libra pose.

Besides the concern over its risks along with the role of big data integrated with financial services, there remains ambiguity when it comes to Libra’s legal classification. Since its inception, Facebook has repeatedly stated Libra would not be deemed a security. However, US Congressman Warren Davidson (R-OH) previously said he thinks Libra should be regulated as a security — the same stance proposed by the new legislation submitted by US Senators yesterday.

If the legislation sees approval, Libra would constitute a security token. Yet Facebook has consistently argued against Libra as a security. In contrast, the social media giant has said Libra will be backed by several currencies, including the US dollar. Facebook’s crypto executive David Marcus has claimed Libra is drastically different from both securities and other cryptocurrencies such as Bitcoin.

In October, Facebook CEO Mark Zuckerberg met with US Congress members in a committee hearing, where Garcia was in attendance. She hoped Zuckerberg would have answers regarding Congress’ many questions on Libra, but ultimately left the hearing “disappointed”.

SEC Publishes BSTX Security Token Exchange Rulebook

Image courtesy of BSTX.

By Tim Fries at The Tokenist

Announced October 17th 2019, the U.S. Securities and Exchange Commission (SEC) has published a rulebook for security token trading. The rulebook was created by the Boston Security Token Exchange (BSTX).

The BSTX Security Token Rulebook Explained

Back in May of 2019, BSTX submitted a rulebook to the SEC concerning the regulated trading of security tokens.

Now, the SEC has published that rulebook. According to executives from BSTX, public comments and feedback are welcome to drive the security token ecosystem forward.

Lisa J. Fall, CEO of BSTX, said,

“The publication of the BSTX Rulebook is an important milestone as we work towards regulatory approval. We believe the proposed rules provide a safe and transparent means for the trading of digitally enhanced securities. We welcome the public to comment or provide feedback on our proposal.”

In the summer of 2018, BSTX was formed by BOX Digital Markets and tZERO Group. BOX provides strategic leadership and regulatory counsel, while tZERO manages technology, admin, maintenance, and support.

tZERO is a subsidiary of Overstock.com, and also operates a security token exchange which went live in early 2019.

Fall went on to outline the potential that security tokens have to disrupt capital markets:

“The trading of security tokens on a regulated securities exchange will pave the way for further innovation in the financial markets. These digitally enhanced securities are an important, responsible step in the adoption of tokenization. Tokenization has the potential to make the capital markets more accessible, efficient, inexpensive, and secure, thereby benefiting all market participants.”

So far, the security token industry has seen more than 60 successful Security Token Offerings (STOs), which collectively raised almost $1 billion.

SEC Chairman Jay Clayton has publicly stated how nearly every ICO he has seen, constitutes a securities offering. The result has been an ongoing transition from the ICO to the STO for the sake of regulatory compliance.

So far, regulated real-world assets to include equity, real estate, investment funds, and even fine art have seen the benefits of tokenization.

The SEC Received Over $4.3 Billion From Penalties In 2019

Image courtesy of the SEC.

By Tim Fries at The Tokenist

According to the U.S. Securities and Exchange Commission’s (SEC) Annual Report for the fiscal year 2019, more than $4.3 billion were collected due to disgorgement and penalties. Out of the funds collected, approximately $1.2 billion were returned to harmed investors.

The SEC’s 2019 Annual Report Explained

2019 was a busy year for the SEC. The commission led a total of 862 enforcement actions, of which 526 constituted standalone actions.

The cases covered a wide array of categories, including issuer disclosure, accounting violations, auditor misconduct, investment advisory issues, securities offerings, market manipulation, insider trading, and broker-dealer misconduct.

A large number of Initial Coin Offering (ICO)-related cases made significant headlines throughout the year.

Two ongoing high-profile cases— where both entities are being sued by the SEC— include Kik and Telegram.

Throughout the year, several blockchain-based companies which previously leveraged the ICO as a fundraising mechanism settled with the SEC. The majority of charges included unregistered securities offerings.

In September for example, the SEC announced a settlement with Block.one, where Block.one agreed to pay a $24 million civil penalty. Charges originally stemmed from a 2017-2018 ICO which raised more than $4 billion.

Additional firms such as SimplyVital Health, Bitqyck, 1Broker, ICO Rating and Plexcoin either settled with or have been charged by the SEC.

SEC Chairman Jay Clayton has publicly said on multiple occasions that virtually every ICO he has seen— minus Ethereum— constitutes a securities offering. Yet hardly any ICOs followed the respective securities laws and regulations.

As a result, the blockchain space has seen a transition from the ICO to the Security Token Offering (STO).

Out of a concern for regulatory compliance, companies are leaving the ICO behind, and turning to the STO as a viable alternative to raise funds.

So far, the nascent security token industry has raised nearly $1 billion through assets including equity, real estate, investment funds, and even fine art.

‘Exchanges Listing IEOs May Be Breaking the Law’ – Says SEC’s Senior Advisor for Digital Assets

Photo by Kimberly White/Getty Images for TechCrunch

By Maciek Kilmowicz at CoinLaw.com

“Platforms seeking to list these tokens for a listing fee or bring buyers to the table for issuers are probably engaging in broker-dealer activity,” said Senior SEC Advisor Valerie Szczepanik.

Speaking at CoinDesk’s Consensus 2019 conference in New York, the Securities and Exchange Commission (SEC) Advisor for Digital Assets and Innovation, Valerie Szczepanik, warned of legal trouble awaiting exchanges that list IEOs and do not follow broker-dealer activity requirements.

“Platforms seeking to list these tokens for a listing fee, or bring buyers to the table for issuers, are probably engaging in it­­. If they are not registered, they will find themselves in trouble in the US, if they have a US issuer, or US buyers if they are operating on the US market,” said the commissioner.

In her comments, Szczepanik referred to one specific case of a platform breaking the broker-dealer activity requirements and paying the price for that infringement, namely TokenLot – a self-proclaimed “ICO superstore” which closed operations back in 2018 “due to the ever-changing regulatory landscape of the cryptocurrency space” according to an announcement on the company’s website.

“This was a platform that was assisting to bring buyers to ICOs… In that case, there was an enforcement action charging the platform with acting as an unregistered broker-dealer and participating in the distribution in violation of the registration provisions,” said Szczepanik.

As a result of that action, TokenLot settled to pay US$471,000 in disgorgement, plus US$7,929 in interest and another US$45,000 from both founders of TokenLot.

Valerie Szczepanik is the co-author of the SEC’s updated crypto regulatory framework published in April 2019.

Article From Coinlaw.io

Digital Assets a 2020 Examination Priority for the SEC

January 9, 2020

Image courtesy of Pixabay.

Author: Tim Fries at The Tokenist

The SEC’s 2020 Examination Priorities Explained

Every year the OCIE publishes examination priorities to remain transparent in its review process. The office aims to present potential risks to investors and show the areas it will examine throughout the coming year.

By no surprise, the office’s examination priorities for 2020 include digital assets. The marketplace for digital assets, says the report, has grown rapidly and “presents various risks”. The office said a primary risk includes retail investors who do not understand the difference between digital assets and traditional investment products.

As a result of such risks, the OCIE says it will continue to examine SEC-registered market participants who are active in the digital asset space. The following criteria will be under evaluation:

  1. Investment suitability
  2. Portfolio management and trading practices
  3. Safety of client funds and assets
  4. Pricing valuation
  5. Effectiveness of compliance programs and controls
  6. Supervision of employee outside business activities

Transfer Agents as an SEC 2020 Examination Priority

Another aspect of examination priority includes transfer agents. Such entities play a crucial role in the settlement of securities transactions — they maintain records for the issuers of securities, record ownership changes, cancel and issue certificates, distribute dividends, and facilitate communication between issuers and securityholders.

The security token industry made notable progress throughout 2019. A number of security token companies received transfer agent registration confirmations from the SEC. The list of companies includes Securitize, Harbor, TokenSoft, Vertalo, and Block Agent.

With regard to transfer agents, the office says it will examine the timely turnaround of items and transfers, recordkeeping and record retention, and the safeguard of funds and securities. Examination “candidates” will include those developing blockchain technology or who provide services related to digital assets, among others.

2020 was not the first year digital assets were featured as an examination priority. Cryptocurrencies were first mentioned in 2018 when the office discussed the need to examine whether or not service providers properly disclosed risks associated with their products. They also made it a priority to review the safeguarding of client assets.

In 2019, the OCIE said it would monitor portfolio management, internal controls, the safety of client funds, trading practices, pricing, and compliance. These same goals were echoed in 2020, with the addition of supervising employees outside of business activity.

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