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Monday, August 13, 2018

Compliance, Crypto, and Blockchain Networking in NYC

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, a Simple Agreement for Future Tokens (“SAFT”) is acommercial 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:

“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”)).

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 ( 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:


FIN Missions ( 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.


Cory Roberson said...

Glad you liked the article. Feel free to share--thanks.

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