Stablecoins Launch in US as New Data Cites Drop in ICO Funding
By: Robert A. Musiala Jr. and Brian P. Bartish
On Monday, Sept. 10, 2018, the New York Department of Financial Services (DFS) announced that it has authorized both Paxos Trust Company LLC and Gemini Trust Company LLC to offer price-stable cryptocurrencies pegged to the U.S. dollar, commonly known as “stablecoins.” According to a DFS press release, the approvals of these new financial products came after rigorous review and will be subject to ongoing examinations to ensure compliance with BSA/AML and OFAC regulations; adherence to cybersecurity standards; prevention of market manipulation; maintenance of proper information reporting and consumer protection; and assurances that the stablecoins are fully exchangeable for the U.S. dollar. Paxos Standard is built on the Ethereum blockchain and is backed by U.S. dollar deposits held in segregated accounts at multiple FDIC-insured U.S. banks, with the account balances verified by independent audit firms. All Paxos Standard tokens in circulation will be backed by U.S. dollars, and upon redemption for dollars, the Paxos Standard tokens will be immediately destroyed. The Gemini Dollar also runs on the Ethereum blockchain, with each Ethereum-based token backed by a U.S. dollar. The dollars backing the Gemini Coin will be held at a major U.S. bank in an FDIC-insured account, with monthly audits to be performed on the account by a public accounting firm.
Also on Sept. 10, various news outlets reported that a major U.S. bank is planning to begin acting as an agent issuing so-called digital asset receipts (DARs) that would effectively allow parties to trade in bitcoin without having to take actual ownership of bitcoin. According to reports, the DARs would function similar to American depository receipts (ADRs), which enable parties to trade baskets of foreign stocks that do not trade on U.S. exchanges. In the same way that an ADR is held by a bank that issues a depository receipt, with a DAR the bitcoin will be held by a custodian, with a receipt issued by the bank. In a separate report this week, another major U.S. investment bank announced that it is working on a bitcoin derivative product that would be settled in U.S. dollars. And on Sept. 12, startup Seed CX announced a $15 million Series B funding round that it will use to expand its offerings of institutional trading and settlement for cryptocurrency spot markets and CFTC-regulated cryptocurrency futures. These developments come amid the announcement of the Blockchain Association, the first ever D.C. lobbying group dedicated to the blockchain industry.
As institutional products evolve, according to new data published by Autonomous Research, nearly half of all ICOs since 2017 have failed to raise any funds. According to the new research, the month of August 2018 saw the lowest rates of return on startup ICOs since May 2017, with such efforts raising only $326 million compared with the $3 billion-per-month average observed during the first three months of the year. The report also found that roughly 40 percent of the ICOs examined raised more than $1 million each, and found that the number of hedge funds specifically focused on cryptocurrency has increased significantly. The move away from ICOs to so-called securitized token offerings appears to be further illustrated by recent news that the Malta Stock Exchange’s fintech and digital asset subsidiary, MSX PLC, recently signed a Memorandum of Understanding with cryptocurrency exchange Binance to jointly launch a new security token digital exchange that seeks to take advantage of the island-nation’s pro-crypto regulatory stance.
According to joint research from the World Economic Forum and Bain & Company, small and medium-sized enterprises (SMEs), particularly in the developing world, could stand to become some of the biggest beneficiaries of blockchain financing, as global businesses could reduce the supply-demand gap in trade financing and generate roughly $1.1 trillion in new trade volume through effective blockchain deployments. In China, the “Guangdong, Hong Kong and Macao Dawan District Trade Finance Blockchain Platform” has begun pilot operations with the backing of the People’s Bank of China that aim to facilitate cross-border trading across provinces and reduce trade financing costs from 7-8 percent to less than 6 percent for SMEs.
To read more about the above developments, please see the following:
SEC and FINRA Issue First-of-Their-Kind Enforcement Actions
By: Jaime B. Petenko
This week, the U.S. Securities and Exchange Commission (SEC) issued two first-of-their-kind enforcement actions in the blockchain industry. In one action, TokenLot LLC and its owners agreed to pay more than $500,000 in penalties to settle charges that they acted as unregistered broker-dealers in the sale and trading of securities. TokenLot LLC, a self-described “ICO Superstore” where investors could purchase digital tokens and engage in secondary trading, handled more than 200 different digital tokens for more than 6,000 retail investors from July 2017 until February 2018. In the second action, Crypto Asset Management LP, a hedge fund, agreed to pay a $200,000 penalty to settle charges that it operated as an unregistered investment company. The fund raised more than $3.6 million over a four-month period in 2017, while falsely marketing that it had filed a registration statement with the SEC and that it was the “first regulated crypto asset fund in the United States.” In both actions the offending parties, once contacted by the SEC, ceased their activities and began refunding money to investors (in the case of TokenLot LLC) or offering buybacks to investors (in the case of Crypto Asset Management LP).
In another reported first this week, the federal judge in U.S. v. Zaslavskiy issued a ruling allowing the government to proceed with a criminal case in the U.S. District Court in Brooklyn, alleging that an initial coin offering is a security for purposes of federal criminal law. In the case, the defendant is charged with conspiracy and two counts of securities fraud for allegedly defrauding investors in two initial coin offerings for digital currencies backed by investments in real estate and diamonds that did not exist.
After trading began in the United States approximately one month ago, the SEC suspended trading through Sept. 20, 2018, of Swedish bitcoin exchange-traded notes and ether exchange-traded notes due to a “lack of current, consistent and accurate information” leading to confusion among market participants. The SEC noted that differing descriptions of the financial instruments in the broker-application materials, in public sources and in the offering materials led to confusion over the nature of the financial instruments. Because of the confusion, the SEC believes that the public interest and the protection of investors required the trading to be suspended.
Also this week, FINRA reported that it filed its first disciplinary complaint involving cryptocurrencies. FINRA charged Timothy Tilton Ayre with securities fraud and the unlawful distribution of an unregistered cryptocurrency security called HempCoin. From January 2013 through October 2016, FINRA alleges, Ayre attempted to lure public investment in his worthless public company, Rocky Mountain Ayre, Inc. (RMTN), by making material misstatements in RMTN’s public filings about its finance and business and by creating, offering and selling unregistered securities, HempCoin. RMTN publicized HempCoin as “the first minable coin backed by marketable securities.” Investors mined more than 81 million HempCoin through late 2017, and bought and sold the currency on two cryptocurrency exchanges.
To read more about these enforcement actions, please see the following:
Blockchain Enterprise Developments: Mining, Digital Identities and Food Supply Chain
By: Njeri S. Chasseau
A Nevada-based Chinese investment company has its sights set on redesigning a 55,000-square-foot U.S. Department of Defense data center into a new cryptocurrency mining center that will, once completed, contain approximately 1,300 mining machines for a variety of cryptocurrencies including Bitcoin and Zcash. The data center is ideal given the security and power requirements of crypto-mining enterprises, and can be upgraded to increase the number of mining machines required for the company’s operations.
Across the Pacific, Australia’s New South Wales government recently announced a partnership with an Australian IT firm to conduct a pilot project that will store and authenticate driver’s license data for approximately 140,000 license holders in the state. A formal launch of the program is set for 2019, and the New South Wales government hopes to eliminate the need for its residents to carry physical licenses; the program is in line with Australia’s Digital Economy Initiative promoting the widespread adoption and use of blockchain in the country. Similarly, an Icelandic automatic identity verification company last week announced the launch of a new blockchain-based identity management solution aimed at combatting the problems presented by internet “trolls” – internet users commonly associated with bullying and harassing behavior online. The new technology seeks to ensure that once trolls are banned from a particular platform, they will not be able to re-register a new account or re-enter the platform.
This week also saw new developments in blockchain solutions for the food supply chain, with a new food supply chain startup, Ripe Technology, raising nearly $2.4 million in seed funding. The startup aims to bring innovation to the food supply chain by using blockchain to increase traceability and transparency between farmers, distributors, grocers and other major stakeholders in the food industry.
For more about blockchain and current enterprise-related uses, please see the following:
Cryptocurrencies Continue to Enter Traditional Areas of Financial Crimes
By: Robert A. Musiala Jr. and Melonia A. Bennett
New developments show criminals continue to abuse cryptocurrencies in the traditional areas of theft, fraud and extortion. On Sept. 5, a press release announced the guilty plea of Louis Meza for orchestrating the kidnapping and theft of more than $1.8 million in Ether. The press release quoted Manhattan District Attorney Cyrus R. Vance as saying “Louis Meza orchestrated a 21st-century stick-up … Then 21st-century investigators brought him swiftly to justice ….” In an ongoing lawsuit in Vancouver, a judge has ordered the return of a former executive’s company laptop, in an attempt to discover up to $7 million in cryptocurrency allegedly stolen by the executive from his former company. In India, a former politician was recently arrested for suspected involvement in a scheme to frame another man for the purpose of extorting $1.3 million in bitcoins. And in Japan, the trustee of the defunct bitcoin exchange Mt. Gox recently announced that corporate creditors can now enter claims as part of the civil rehabilitation to claw back their bitcoin through a newly approved process.
To read more about the above developments, please see the following:
