By
Cory Roberson, Principal at FIN Compliance and FIN Lancer
August 13, 2018. Last week included a pit stop to
New York City to research regulatory developments in crypto, token sales (ICOs/STOs*),
and its underlying blockchain-fueled technologies. This new space, assuming further global
adoption and legislative rulemaking, has the capacity to improve
authentication, financial transfers, data sharing, compliance, supply chain, security,
logistics, and other operational functionalities across many industries.
Challenges
remain as blockchain development outpaces regulation. Despite this deterrent, blockchain growth persists
as entrepreneurs work around the surmounting regulatory scrutiny.
* What are ICOs and STO’s
ICO – Initial Coin Offering; STO
– Security Token Offering
Both are instruments commonly
used by blockchain-based entrepreneurs in fundraising endeavors.
While the SEC delays its
verdict of a publicly traded ETF (ref. Van Eck Bitcoin ETF)
and crypto markets sustain bearish conditions, many blockchain startups are
using this time to test its business models for validation. One can consider this period to be the “Wild
West” in terms of STO/ICO-fueled business model development.
New York wasn’t my only stop at the blockchain rodeo this
year. In June, I attended a Decentralized
Innovation conference on the island of St. Kitts/Nevis to research how this
emerging technology is shaping island nation states, including Anguilla, Malta,
and Mauritius. Entrepreneurs, such as Telly Onu and McKenzie Slaughter,
are paving the way in terms of crypto development on the island nation. Both founded event sponsor, Beyond Capital
Markets, a decentralized global impact network featuring blockchain and FinTech
entrepreneurs around the world. Last
July, I spoke at ICO4Impact Summit, an
event also sponsored by Beyond Capital Markets, in Los Angeles.
Compliance, Crypto Models, and Funding
On
this trip, my first stop was to the launch of Crypto Commons, a new
co-working facility designed to support the burgeoning blockchain community
around the world.
Note--My brain is still processing the content
discussed over the 3-hour networking session.
The
next stop included an informative panel discussion on Regulation and Compliance in Blockchain Investing. The blockchain-compliance session,
comprised of attorneys, former regulators, investment
managers, and tech entrepreneurs, outlined the regulatory landscape for blockchain-based
solutions in terms of business model development. The event was sponsored by
Blockworks Group, a blockchain events
and advisory group.
Over the two-hour session, executives and attorneys
provided hypothetical based on a few prominent case studies and whitepapers
used as the basis for the discussion as outlined below.
Panel 1 – Blockchain-based solutions in
commercial enterprises
This segment provided a critical look of
commercial enterprises that are testing blockchain solutions using API’s in
ecommerce, trade finance, and other transactional-based functionalities. Speakers, Wendy Callaghan, Chief Innovation
Officer of AIG, Amenda Valencia Garcia, Chief Senior Blockchain Counsel of IBM,
and Jonathan Anastasia, Senior Managing Counsel of Mastercard Labs, presented a
series of use cases and its legal issues.
Many large institutions, such as IBM, AIG,
and Mastercard are working with competitors (“co-petition”) to test blockchain
solutions (and facilitate the movement of data) for its own commercial markets. The emergence of blockchain-testing models
creates a precedence for new legal issues to tackle including: Intellectual
Property, Anti-Trust, Competition, and cross-border data protection.
The panel highlighted that, while framing a
solutions-based architecture, many blockchain legal teams will be tasked with
adopting an intellectual property framework around: (1) Who owns data, (2) Who
gets rights to access data, (3) Who is going to have control over onboarding
new/existing systems onto a blockchain, and (4) How to deal with cross border
compliance (e.g. GDPR).
GDPR, a European compliance privacy
initiative drafted before the prominence of blockchain, will present new legal
issues for data sharing amongst commercial entities.
Panel 2 – Compliance, Crypto and Token sales
This group highlighted compliance,
legislation, and investor roadblocks for crypto funds and token sales in the
U.S. Speakers included, Dan Viola,
Partner & Head of the Regulatory and Compliance Group of Sadis &
Goldberg, Rob Nance, Managing Partner of CityBlock Capital, and Steve Hopkins,
COO & General Counsel of Medici Ventures & tZERO.
Regulatory Roadblocks
and state support
As
briefly discussed in the introduction, the emergence of crypto provides
regulatory challenges for businesses dealing with: (1) U.S./global investor
restrictions, (2) scrutiny from token launches, (3) FinCen inquiries, (4)
SEC/State examiners, and (5) Custody rule procedures for digital assets.
Executives,
from CityBlock Capital and Medici Ventures, expressed their concerns that existing
U.S. laws (Reg. D) prohibit many retail investors from access to business
opportunities available to wealthy investors.
Mr. Nance of CityBlock Capital expressed his interest in the “democratization
of the VC model” by providing the public with access to early stage companies
through a tokenized fund of fund structure.
Speakers,
such a Mr. Dan Viola, highlighted that the emergence of crypto funds and token
sales prompt a need for amendments to the Securities and Advisors Acts. The consensus amongst the panel was that many
of these instruments will be considered securities, and as such, will prompt
the need for further regulatory rulemaking to clear ambiguities.
At
this point, we are unsure if regulators will work together to provide
harmonious growth (or the discombobulated
kind) that we see playing out with the Fiduciary rule debacle.
For
example, the Financial Crimes Enforcement Network (FinCen) puts ICO’s under its
scrutiny by deeming these structures as “money transmitters.”
This
means that down the road, ICO’s may have multiple (or overzealous) regulators
breathing down its back if jurisdictional guidelines aren’t cleared up. Just imagine if every regulator creates its
own rules that overlap each other – a complete mess.
Some
states are moving the innovation wheel forward through initiatives to support
blockchain development. Rhode Island,
with a lineup of politicians including Gov. Gina M. Raimondo, pitched to a group of representatives
from over 100 blockchain companies to offer its state for business growth and
development. To further tech growth, Arizona has become
the first state to offer a FinTech regulatory sandbox.
Panel 3 –Blockchain solutions for custodial
banks
Gangesh Ganesan, CEO of Peer Nova discussed
how his software company is helping its large custodial banking clients to use
(or test) distributed ledger technology (“blockchain”) in its clearing services
for OTC, derivates, trading, and other operational services. He
anticipates major developments continuing in certain sectors of the capital
markets banking sector in the near term.
Panel 4 – SAFT, tokens, and the “Howey” Test
This discussion evaluated the process of crypto
tokenization and its regulatory framework as a security or utility. Attorneys,
Joshua Ashley Klayman, Co-Founder of Smart Contracts & Blockchain Practice
of Morrison & Foerster, Joel Telpner, Partner of Sullivan & Worcester,
and Stephen Wink, Partner of Latham & Watkins discussed the importance of
the SEC v. Howey (“Howey Test”) and using SAFT as a potential metric for future
rulemaking in token-based transactions.
What is
SAFT?
As
defined by the SaftProject.com, a Simple Agreement for Future Tokens (“SAFT”)
is a “commercial
instrument used to convey rights in tokens prior to the development of the
tokens’ functionality. In the U.S., the
SAFT itself is a security, so it could be offered in a private placement to
accredited investors.”
The
instrument, as discussed in its whitepaper, is largely seen as a potential
framework for transacting business or facilitating investment contracts with
consideration of U.S. based Securities Laws.
Download the whitepaper here at: https://saftproject.com/
“The
digital asset itself is simply code. But the way it is sold – as part of an
investment; to non-users; by promoters to develop the enterprise – can be, and,
in that context, most often is, a security – because it evidences an investment
contract. And regulating these transactions as securities transactions makes
sense. The impetus of the Securities Act is to remove the information asymmetry
between promoters and investors.”
-SEC Director Bill Hinman
Inside a speech at the Yahoo Finance All Markets Summit, SEC
Division Chief, Bill Hinman relayed his viewpoints into evaluating digital
assets as either a security or utility based on the SEC vs. Howey (“Howey
Test”)). https://www.sec.gov/news/speech/speech-hinman-061418
Under the guidance of the Howey Test, a security
is deemed as an “investment contract” that has the “expectation
of profit derived from the efforts of others” or an instrument
cultivated in a way with the expectation of going up in value. In certain instances, a token sale can fall
under the scope of this definition of investment contracts.
Other factors, such as tokens functioning in a decentralized network,
not tied to any one person, business, or team, may not represent a definition
of a “security” but rather a utility.
With that said, there are a large number of implications that
will be considered within the framework of U.S. securities Laws.
In the meantime, the SEC will have their hands full on
sorting on these issues. Expect for new
regulations to tie into the existing securities framework.
Crypto Investments & Suitability Issues for
Investment Firms
Let’s rehash on
the applicability of crypto for the traditional investment management
space. Until the first Crypto ETF’s are
approved, and the emerging Alt space is established for fund managers, Crypto/ICO
activity is primarily geared toward the accredited (or Reg. D) investor
space.
As mentioned in my
blog “Potential for Crypto Funds,
Suitability & Regulatory Hurdles,” traditional investment advisors
will have a difficult time proving suitability for the majority of its client
base. The extreme volatility would not
be appropriate for most client-based recommendations. We will keep you informed as crypto/blockchain
markets develop.
Firm can sign up
for our compliance video series on RIA Review for an overview of other
topics.
Introducing RegTech, FinTech, Blockchain and Crypto
issues.
After attending these events it was clear to me that blockchain is at the
centerpiece of the next generation of tech entrepreneurship or Web 3.0 as some
would call it.
To get our network
up to speed on new technologies, we will be announcing public regulatory
webinars that will feature service providers in the FinTech, RegTech, Crypto and
Blockchain communities. Stay tuned for announcements
as we prepare the launch of an upcoming platform.
Vendors
can contact us for information of listing their business on our site.
Disclaimer: We do not endorse or approve of any
investment strategies, ICO’s, blockchain or business models discussed in this
blog. The contents of this blog should
be used for informational purposes and to report compliance issues only. Please contact your attorney and/or compliance
team for interpretation into appropriate actions for your blockchain firm.
Compliance and Business Management
FIN Compliance (FINCompliance.io) is a
consortium of compliance services including: RIA Consults-Roberson Consults
Group, a compliance consulting firm, RIA Review, a compliance-management
software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management
software tool, and FINLancer is a business
management portal featuring: E-signature tools; Invoicing integration,
Vendor Directory, continuity directory*, business client document portal, and
more (available by Q3 2019). Access all services
on one site: FINCompliance.io.
Impact
FIN Missions (FINmissions.com) provides business support group
sessions for other entrepreneurs. In addition, Cory has volunteered
for more than fifteen youth programs in locations such as like S. Korea, China,
S. Africa, Thailand, and India.
8 comments:
Thanks for the great information, its very useful for me thanks for the shairngs
Blockchain Development Company
Glad you liked the article. Feel free to share--thanks.
I found so many interesting stuff in your blog especially its discussion. Really its great article. Keep it up. crypto airdrop
Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me. Tedd Young Business News
Blockchain works like an advanced record in which exchanges are utilized Bitcoin or cryptocurrencies. As indicated by the Blockchain specialists, this innovation gives a completely protected approach to making or recording every one of the exchanges, understandings or contracts.Lucrotrade
I think this is an informative post and it is very useful and knowledgeable. therefore, I would like to thank you for the efforts you have made in writing this article. https://blockchainwhispers.com
Hi there, I found a few helpful articles in your blog keep it up. freecoins24.io
Fraud - any issue with fraud is kept to a minimum because cryptocurrency is digital which can prevent a reversed or counterfeited payment. This type of action can be a problem with other traditional payment options, such as credit card, because of charge-backs.Bitmex Resources
Post a Comment