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Tokens were equated to securities
The authorities of the SEC, better known as the U.S. Security and Exchange Commission, as is well-known, recognized the initial public offering of the so-called tokens (or cryptocurrency, or ICO) as an equal, conventional offering of a company asset and business, stock. This commission isn’t the only authority internationally to recognize the fact of the information shown above.
This market regulator, among other things, released information regarding how market participants can evaluate the US laws that regulate operations relating to securities, on par with those related to cryptocurrencies. The new procedure stipulates that regardless of if the issuer is a decentralized, independent organization or a traditional finance company, as well as in situations when asset acquisitions are made in US dollars or cryptocurrency, all these exchanges are obliged to follow the same rules. Likewise, from this point forwards it does not make a difference if they are distributed traditionally or if they are distributed through the use of technology of the distribution registry.
The exchange distribution of cryptocurrencies these days is extremely vibrant. The excitement about them has by no means died down, on the contrary, it has only grown. Therefore, the exchange remains as it always has, namely, a segment of the financial market where you can both earn and lose allot.
Now, these companies that release assets based on blockchain will also be required to register their operations. Those who continue operating without registration will be held criminally liable for their actions by specialized authoritative bodies.
Among other things, the SEC requires those who wish to trade with this type of asset to register at the exchange.
As we all know, $43.9 million crypto “coins” created through blockchain were withdrawn due to an SEC investigative report following the conclusion of an audit of crypto-exchange operations by the DAO (Decentralized Autonomous Organization) project.
The DAO project attracted millions of dollars in the form of ethers, which has, in essence, the same algorithm as bitcoin. The so-called “ethers” are formed using the same blockchain technology. They are widely used on Ethereum’s platform, whose creator is without a doubt one of the most talented young programmers, Vitalik Buterin.
The DAO can practically be considered an exclusive algorithm for venture funds and it is used properly for attracting investment to cryptocurrency start-ups.
The management of these funds if completely automated, they run through a special computer program. All the finer points and principles of how it runs, down to the most common managerial tasks to every day “basic” financial operations and calculations of earnings, are clearly and consciously written into its computer code.
By the way, as recent as 2020 the DAO was hacked. In all, they made off with several million “ethers”, worth around $60 million dollars.
The same DAO collected $107 million dollars to invest in a special project on Ethereum dealing with a type of blockchain.
According to SEC data, despite the fact that the DAO considers itself to be a crowdfunded project, it does not adhere to even the basic requirements for crowdfunding. To start with, the authorities decided against pursuing punitive measures against the DAO, however, they have been official warning publicly relative to all financial exchange participants. According to Stephanie Avakian, the SEC Co-Director of the Division of Enforcement, these measures were absolutely necessary to safeguard the investors themselves, as well as the market as a whole.
Despite the fact that the SEC doesn’t lack legislative power, they heavily influence American exchange activity. Her statement, in turn, brought investors to the realization that they would be deprived of achieving a specific law regulating cryptocurrencies.
The head of the Elina Sidorenko, the head of the interdepartmental working group focusing on concerns related to evaluating the return risks of “crypto coins” in the Russian State Duma. According to Ms. Sidorenko’s statement, the SEC has established new norms. The SEC only highlighted that they have the authority to decide if each of the existing ICOs has the right to issue this or that security and that they will resolve this on a case by case basis.
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Ms. Sidorenko believes that, “the legalization of ICOs will cause the vast majority of prospective projects to fail, and the US, who decided upon a path to ICO legalization alone, has set a high bar to register legally, and it, in turn, will be taken into account by the State Duma’s working group.”
The US, having first recognized bitcoin as a payment method, gave LedgerX permission to offer cryptocurrency contracts.
According to Reuters, ICOs, or more accurately, their various investments, have become a literal “gold mine”, which has opened up new opportunities for participants to conduct an array of different operations with cryptocurrencies.
Participants received directly the incredible opportunity to quickly accrue millions through selling cryptocurrencies, while they remained under the authorities’ radar.
According to a report that cites Smith + Crown research data, already by summer 2020, tech firms raised about $1.1 billion in 89 ICOs, roughly ten times greater than that of the previous year.
Cryptocurrencies have established a fundamentally new method of attracting investment.
According to a statement made by Preston Byrne, a technology attorney for Reuters, “This is a shot across the bow for many of these ICOs”.
Russian authorities, intrigued by blockchain, are partly interested in the direction of growth in this sector on the financial market.
In particular, Mike Lobanov, General Partner at Target Global, who invested in the London crypto exchange CryptoFacilities, thinks that the SEC came to the right conclusion, saying that the current ICO market is the new “Wild West”. According to his opinion, at the moment ICO projects are created that attract massive investments, however, in all actuality they are worthless. The SEC can soundly argue that, regardless of if financiers consider the securities’ distribution process of ICOs or IPOs, the requirements for both will be completely equal.
In terms of what will happen to those who funnel funds into an ICO, the SEC makes clear to any US investors that it isn’t worth it to be tempted unless you want to run into legal problems with US authorities.
In Russia, the ICO exchange is not so pronounced.
In accordance with the laws of the Russian Federation, securities are recognized through legal documentation, which strictly adheres to the set requirements. This position isn’t without its supporters, who are convinced that cryptocurrency releases should be equated with the production or issuing of securities.
Those opposed are convinced that bitcoin shouldn’t mandatory rights and can’t be a financial obligation. Based on the assumption that cryptocurrency transactions are no better than bartering. Therefore, it makes no sense to regulate cryptocurrencies like securities, prior to enacting a law that makes blockchain shareholders just as legally liable as traditional shareholders.
The SEC report also “centralizes” the exchange, however, this will decimate nearly all the attraction of ICOs in the first place.
Lawmakers “hit the brakes”, aiming to protect masses of amateur investors. However, it is possible that the new legal norms will be developed further, making the legislative norms friendlier to investors as well as participants.
“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”
Court to Decide Whether Tokens Are Securities
March 8, 2020 2:28 pm 0
The United States Eastern District Court of New York is to become the first court in the world to rule on whether tokens are securities.
The matter concerns an ICO for a real estate backed token, REcoin, which aimed to create a platform through ethereum based smart contracts to create a token economy of sorts for real estate. And a similar diamond backed ICO.
Criminal charges have been filed against it, as well as pending civil charges by the SEC, under the premise there was fraud through mis-statement of facts and because no tokens were actually given to investors.
The reason for the latter is unclear, but the misstatement of facts premise appears to be somewhat weak, although perhaps justifies.
Which means this case mainly rests on the charge this was an illegal securities offering. A charge Mildred M. Whalen, attorney for the defendant, disputes on numerous grounds.
First, as a crypto-currency, this was meant to act like real estate backed currency, similar to how the dollar was given intrinsic value by the backing of gold, she says. Currencies are explicitly excluded from the definition of securities, she tells the court:
“Although the statute contains a lengthy list of covered assets, the definition of a “security” in the 1933 and 1934 Acts does not include the term “cryptocurrency.” No U.S. court has held that cryptocurrencies are “securities.”
In fact, the 1934 Act expressly excludes “currency” from the definition of security. See 15 U.S.C. § 78c(a)(10) (“The term ‘security’ means . . . but shall not include currency”).”
To back her argument she explains how the real estate backed token was to act as a currency, stating:
“REcoin was to be an innovative token ecosystem where real estate players including brokers, tenants, purchasers, developers, architects, and lawyers could purchase REcoin tokens to facilitate a variety of real estate transactions…
As an example of a potential smart contract on the REcoin blockchain – a developer and an architect could agree to enter into a smart contract where the architect would design a building for the developer for an agreed upon amount of REcoins.
The terms of that smart contract, for example price, timeline, scope of design, time commitment, and parameters of conceptual design, would be recorded on the REcoin blockchain ledger.
Once the terms of that contract were triggered, the digital contract would execute and implement a transfer of REcoin tokens from the developer to the architect. There would be no need for attorney fees and banking fees. The contract would automatically execute.”
The token thus acted as a means of exchange, it was also a store of value so backed by real estate, and acted as a unit of account in the smart contract transactions. As such, it had the plain meaning of currency as in the statue, Whalen says.
With currencies so being excluded from being classified as securities under the act, then the charge of illegal securities does not stand, she argues.
Nor do tokens meet the definition of securities as defined by case law, she says, giving the settled definition of:
“An investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
There was no investment of money here, she says. There was merely an exchange of one money, say eth, for another money, REcoin.
Nor was there a common enterprise, she argues. “There is no pooling of assets. Each individual purchases a REcoin or DRC, and then is free to do with it as she wishes…
Additionally, there is no pro-rata distribution of profit… Any profit resulting from the sale of real estate or diamonds supporting the value of this commodity-based currency is ploughed back into the purchase of additional real estate or diamonds.”
Nor was this based mainly on the entrepreneurial or managerial efforts of others, she says, arguing that:
“REcoin and DRC were to be a new kind of decentralized token economy where adoptors with shared professional interests could work together to create an ecosystem where shared related professional transactions could be conducted securely, efficiently, and without the need for centralized banks…
Without the continued participation of the stakeholders, the blockchain would become valueless… If all of the purchasers simply relied solely upon the efforts of Mr. Zaslavsky, the blockchain would die.”
Finally she makes a strong stance for unconstitutional vagueness, especially considering currencies are explicitly excluded, thus making the statue contradictory as it applies in this case because many courts have said cryptos are currencies.
“Cryptocurrencies are an asset class that have never before existed. The attempt to regulate this new asset class using the framework conceived of in the 1930s is troubling…
There is no meaningful guidance for would-be developers to know whether their work runs afoul of criminal securities laws…
These laws provided no meaningful guidance for how a potential defendant could navigate this potential statutory contradiction.
The vagueness doctrine bars enforcement of a statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application.”
Whalen is challenging the indictment itself, rather than any allegation of fraud or any other matter. She says:
“A motion to dismiss an indictment challenges the adequacy of an indictment on its face. Thus, the indictment must be viewed as a whole and the allegations must be accepted as true at this stage of the proceedings.”
This is therefore a general point of law beyond this case, with SEC quickly asking for permission to file a brief in support of the criminal prosecutors.
Making it thus a David and Goliath showdown, so having a legal aid defendant against an army of SEC lawyers. Which is why participants in this ecosystem – perhaps those that have raised millions in token sales, or ConsenSys or some fine lawyer who wants to make a name for himself – might want to file briefs in support of the defence.
Because this may be a precedent setting case, with the fate of a billion dollars industry and perhaps that of innovation in America standing on the hands of a Cornell Law School graduate and trial attorney.
“While the regulation of alleged fraud is a laudable goal for the government, it does not follow that United States securities laws are the appropriate means to accomplish these goals,” she says.
She could be assisted by pointing out that the only legislative body to consider a law on this matter, which has now passed, has explicitly excluded tokens from securities.
Because there are plenty of laws that can be utilized against fraud or scammers without invoking the discriminatory Securities Act to a completely new innovative technology that is barely at a nascent stage.
Security Tokens: Blockchain and Real-World Assets United
After cryptocurrencies blew up the world, huge money began to be invested in them. Then, a serious investment in tokens and initial cryptocurrency offerings began. Along with the influx of funds,fraud cases have increased. This attracted the attention of state bodies, which were strongly concerned about the safety of people who were mindlessly investing in ICO. Then, the SEC (Securities and Exchange Commission) proposed to use a Howey test to define if the token has securities features and can be named a security token. Experts feel like they will make a huge breakthrough in the future. Many believe that the future of the cryptocurrency world is behind this type of tokens.
What are the security tokens
A security token is a new token, which, in essence, is a digital share. That is, by purchasing such a token, the buyer becomes the owner of a real asset, unlike conventional crypto investing in a project with questionable profitability. In this case, the investor receives a real digital share. It can be:
- a share of the company capital
- a share of any other asset, such as company property.
The security token owner can have a variety of rights. He may be the owner of a share or receive dividends, debt payment or the right to vote. There can be a lot of options, but it is the security token that can be called the object closest to securities in the traditional sense.
Security tokens are the legal answer to SEC
2020 was a year of heated disputes over the legal status of cryptocurrencies and ICO. One of the bodies that paid the most attention to this problem was the US Securities and Exchange Commission (SEC). In the first half of the year, there were numerous scandals in the United States regarding various dubious ICO projects. Suffice it to recall only the scandal with the Bitcoiin project, with Steven Seagal as the poster boy.
It had come to the point that the SEC issued an order according to which certain types of tokens are equated to securities. Because of this, there were many new cases. The problem of the bloated market and fake ICO reached such extent that it was necessary to urgently find a solution.
The difference between security and utility tokens
Utility token is a useful token. In fact, it is a cryptocurrency. That is, its owner gets certain opportunities when using any products of the company acting as an issuer. Accordingly, the owner of such a token gets access to any additional features, but nothing more. For example, he can pay for the purchase with utility token. The most basic example is the internal currency in online games.
The security token is a completely different type of token. This is an asset that allows you to get any profit in the future.
How to determine what kind of a particular token belongs to? The Howey test, accepted by SEC, will help.
Answer the following questions:
- Will you get real income?
- Is investment the main task?
- Can you receive income from a third party?
- Will the money received from the asset sale be invested in the company?
If the answers to all these questions are ” Yes ” – you are buying a security token. In other cases, it is a utility token.
Security token examples
Bcap (Blockchain Capital)
Blockchain Capital is a successful project of Brock Pierce, Bart Stephens and Bradford Stephens. Blockchain Capital is the first company offering a security token. Its ICO brought huge improvements to the existing token sale industry. First, only the accredited investors could give funds to the project. Secondly, Bcap became a pattern for future security tokens offerings. The Blockchain Capital token sale was extremely successful. Bcap reached the hard cap of $10 M within a couple of hours. The earnings were transferred to a Blockchain Capital Fund. Its managing partners get 2.5 % management fee and a 25% performance fee. All other token holders get the remaining profits.
It is a fund and a startup incubator focused on Blockchain investments. The fund was raised based on the security token offering (STO). Token holders get 70% of the income from portfolio startups. Plus, it is expected that the fund’s revenue will be used to re-buy the tokens – it is called a buyback program.
The project’s goal is to transform the industry of venture investments with the use of the tokenized model. It offers great liquidity to the investors. The company is focused n security tokens for now, and its first portfolio company is Securitize. However, in the future, SPICE VC is planning to enter the utility token market.
Sia is a p2p cloud storage blockchain platform. It allows hosts to lend their storage capacity to the renters. All the participants of the platform use utility tokens – Siacoins to pay for deals. But there is another type of tokens at the platform – Siafunds. These are the tokens that the platform receives from renters and hosts as a network fee – it’s about 3.9% of the total spending.
750 Siafunds, out of the total 10,000, are offered as a reg D security token by the Nebulous company – the operator of the Sia platform. This is a great example of a dual token usage.
In all cases, the tokens meet all the requirements of the Howey test. Accordingly, we have real security tokens.
Security tokens as a new step to a reliable ICO
Unfortunately, fraud in the ICO continues to be a huge problem. A large number of projects will never see the world, which means that investors’ money will remain in other people’s pockets.
The main mechanism of protection is the literacy of investors who should look not at beautiful pictures, but at the prospects and teams that are behind these projects. Also, the current practice of freezing ICO funds and unlocking part of them after the implementation of the team’s promises (at least a couple of them) is very helpful. Nevertheless, further regulation will completely transfer a part of the tokens to full-fledged securities. This will become an additional mechanism for the investors protection by the state bodies. In addition, the prepared legal framework will expand the opportunities of offline companies to attract investment through the token sale, which is much cheaper and faster than the classic IPO.
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