Tag: finance

In Q1 of 2019 alone the number of STOs increased by 130%, highlighting the rapid speed at which this form of fundraising is taking place. In this article, we examine which jurisdictions are gearing up for the STO revolution. 

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Security token offerings (STOs) are rapidly picking up momentum. In order to keep up with the growing demand, more countries are looking at their traditional securities laws and regulatory efforts. With the tokenisation space now beginning to enter a maturity period, many of these countries are beginning to see how the STO will fit in.

In this article, we examine a list of the major jurisdictions that are preparing for STOs. We discuss what each jurisdiction is doing, as well as the regulatory measures in place. This article will also outline how more jurisdictions are beginning to open up to the tokenisation of traditional securities.

UK

The Financial Conduct Authority (FCA) has been very welcoming in the tokenisation and blockchain space. In January of this year, the FCA released a paper which examined the overall regulatory measures that would be in place for digital assets. The security token was covered in this paper and the FCA outlined the overall regulatory measures that STOs would face. 

In the most recent cryptoasset paper, released in March of this year, the UK’s financial regulatory board went on to state that:

“We do not intend to capture derivatives that reference security tokens. Such tokens are Specified Investments and do not pose the same risks as exchange and comparable utility tokens. They offer contractual rights or obligations (eg an entitlement to profit share), and so have a basis for their valuation. Security tokens that are transferable securities and offered to the public over a certain size may also be subject to the Prospectus Directive (or the Prospectus Regulation from 21 July 2019) and be listed on a regulated market, triggering additional regulatory obligations.”

In summary, under the FCA rules and regulations security tokens are recognised in the same way as traditional securities. This allows the selling of security tokens and regulated STOs. It marks a huge step forward for the tokenisation space and also the maturing of the token concept as a whole. 

Having been placed in Cohort 4 of the sandbox last year, TokenMarket has experienced first hand how the UK Watchdog operates and allows disruptive businesses to thrive whilst being in a safe regulatory environment. 

Switzerland

As one of the most important banking and financing hubs in the entire world, Switzerland’s attitude to STOs is very conservative as one would expect. The Swiss Financial Market Supervisory Authority (FINMA) classes security tokens in the same terms as equities, bonds or derivatives. This means that all Swiss security laws, regulations and penalties apply to the issuer of these STOs.

Of course, FINMA has not opened the doors wide open for potential STO projects but merely asked to see a demonstration of how they will work. Each STO project is also taken on a case by case basis and reviewed before a definitive decision is made. Once the token passes the review, the Swiss securities laws apply to the project immediately. 

The Swiss financial laws require all projects to conduct thorough Know Your Customer (KYC) and Anti-Money Laundering (AML) checks on every investor, a mandatory procedure for all securities investments. Projects must also pass the “big five” laws of Swiss finance: the Stock Exchange Regulation Act, the Anti-Money Laundering (AML) Regulations, Banking Regulations, Financial Market Infrastructure Regulations, and Collective Investment Scheme Regulations.

FINMA has these laws in place to ensure that all market participants are protected and treated fairly. In order for an STO to eventually go to the public stage, it must adhere to all five of these laws or it faces a severe penalty.

Germany

As a potential jurisdiction to launch a STO in, Germany has been one of the more popular choices. In recent months, a growing number of STOs have launched in the country under the supervision of the Federal Financial Supervisory Authority (BaFin), with several more planned for 2019 and 2020 already. The German regulator operates in alignment with the Markets in Financial Instruments Directive 2014/65/EU (MiFID II). 

Germany’s financial and securities laws are fairly straightforward when it comes to the tokenisation process. Like most jurisdictions, STOs that are offered in Germany fall under the traditional security category. In the eyes of BaFin, a security is anything which can be “standardised and traded on a capital market.” This means that tokenised securities are subject to the same rules as, say, a bond.

KYC is a vital part of the offering and BaFin requires all STOs to carry out such checks on investors. Strangely, potential STO projects that are located in Germany must also obey e-commerce laws as the tokens are being sold via the internet and not a traditional market. However, once the trading of these tokens begins, the tokens must adhere to regulatory restrictions that are in place on trading platforms, just as all securities must.

Italy

Italy operates under the same guidelines which are laid out in the MiFID II directive, much the same as Germany. The Commissione Nazionale per le Società e la Borsa (CONSOB) is responsible for regulating the securities market in Italy. In recent discussions, CONSOB has outlined that the tokenisation process is very similar to creating traditional securities, thus meaning it will be regulated as such. 

A paper released in March 2019 by the Italian securities regulator outlined that:

“It should be added that the representation of legal relationships through a ‘token’ (the so-called ‘tokenisation’) shows some similarity to the ‘securities creation’ mechanism, i.e., the embedding of the subscriber’s rights in a certificate which entitles its holder to exercise subscriber rights, and which is a tool for facilitating transfer of these rights.”

The KYC/AML processes in Italy are also slightly different. According to CMS Law, carrying out these processes “would depend on the type of entity offering the security tokens and on where they are established.” For STO projects carried out in Italy, it also means that the application of KYC/AML would not have to be a necessity and would be looked at on a case by case basis by CONSOB.

France

France has been one of the nations championing tokenisation and distributed ledger technology (DLT). In fact, Société Générale issued a €100 million euro bond onto the blockchain in the form of a tokenised security in April of this year. The country has been at the forefront of tokenisation and has even begun to use blockchain in its national railway stations.

During the ICO peak period, France had a lot of positive attitudes towards tokenisation and blockchain space. This attitude has changed very slightly but the country is still accepting of tokens on the whole. Under the French Monetary and Financial Code (MFC), securities which have been tokenised are subject to the same traditional securities laws. 

This means that all French STOs are treated the same as bonds, derivatives or commodities and are required to carry out the necessary KYC/AML checks under the MFC regulations. In doing so, it means that investors, regulators and the STO issuers themselves are all protected. 

Under the MFC regulations, the blockchain which any STO project uses must record all information in a way which would show the investors, the number of shares owned and other vital details.

Japan

In the wake of the tokenisation space growing in popularity, Japan has made an effort to amend its securities laws to help growing businesses utilise the technology in order to thrive. The country recently updated the Act on Settlement of Funds and the Financial Instruments and Exchange Act (FIEA). Both of these acts being updated means that any potential offering, whether ICO or STO, will be subject to the same securities laws as traditional markets. 

All potential STO projects must also first register their offering with the Financial Services Authority (FSA). The offering must go through a variety of stages in order to be approved, and the process can take a few months to complete. KYC/AML checks apply for all investors, just the same as they would in a traditional market offering.

For tokenised security projects who are looking to launch in Japan, they must disclose information about the offering. Working alongside the regulators, projects must also comply with disclosure requirements such as filing a securities registration statement and ongoing securities reports. However, an issuer is exempt from the basic disclosure requirements when an STO is conducted on a private placement basis.

Final Thoughts

Whilst major countries like China and the United States still wary of the tokenisation and blockchain space, it is encouraging to see more jurisdictions opening up to the idea. Security tokens are beginning to become more prominent across some of the world’s largest global economies. It marks the beginning of an exciting time and also highlights how these countries are seeing the potential benefits of STOs.

The regulatory frameworks are already in place for all the countries discussed above. In essence, the security token is simply another wrapper for traditional securities to be involved in. For projects and regulators alike, it means that decades if not centuries of financial laws can be applied to the STO; making it easier for overall adoption.

With the number of STOs growing day by day, there is no reason why it will not become a prominent part of everyday life in the near future. We at TokenMarket are happy to be a part of that.

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The U.S. Securities and Exchange Commission has fined a Russian firm for publishing positive initial coin offering pitches without disclosing it was taking payment for doing so.

ICO Rating is alleged to have published reviews for payment between December 2017 and July 2018. The SEC’s issue with the site, which marketed itself as “a rating agency that issues independent analytical research” for potential ICO investors, was that there was no differentiation between paid and legitimate reviews.

Where the case gets interesting, particularly for the precedent it sets for the promotion of ICOs, is that ICO Rating was accused of breaching Section 17(b) of the Securities Act of 1933 – the anti-touting law. The section of the act reads:

It shall be unlawful for any person. . . . to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.

Other sites have been investigated and fined for publishing paid articles concerning investment opportunities without disclosing the fact before, but this is the first time a site in the ICO business. Mark Roderick, a lawyer at Flaster Greenberg, warned that sites promoting ICOs without full disclosure could be targeted by the law in May 2018.

“The securities laws require promoters, including both people and entities, to disclose compensation they receive for touting investments so that potential investors are aware they are viewing a paid promotional item,” Melissa Hodgman, associate director of the SEC’s Enforcement Division, said in a statement Tuesday.  “This requirement applies regardless of whether the securities being touted are issued using traditional certificates or on the blockchain.”

ICO Rating, which is offline at the time of writing, paid $268,998 to settle matter — a civil pentalty of $162,000 and disgorgement and prejudgment interest of $106,998.

The ICO market has dropped off in 2019 after its boom during 2017 and into 2018, but ICOs still occur and the SEC continues to take action. On Aug. 13, the SEC obtained a restraining against Veritaseum, which raised $14.8 million in an initial coin offering in 2017, claiming that the ICO was engaged in illegal activity. The company is fighting the allegations and has since asked the court to lift a freeze on its assets.

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The US Securities and Exchange Commission (SEC) has charged a Russian Initial Coin Offering (ICO) rating service for allegedly failing to disclose payments made in return for touting ICO cryptocurrency events. 

On Wednesday, the US regulator said that ICO Rating has agreed to pay $268,998 to settle a damages claim for allegedly accepting payments “from issuers for publicizing their digital asset securities offerings.”

According to SEC, between December 2017 and July 2018, ICO Rating churned out research reports and recommendations to assist would-be investors in finding ICOs, tokens, and coins that were genuine and worthwhile prospects for trading — however, the company did not mention that some issuers would pay for inclusion and ratings. 

See also: What should you do when your ICO is dead in the water? Flog it on eBay

While ICO Rating touted its services as “a rating agency that issues independent analytical research” for the purposes of “helping the market achieve the necessary standards of quality, transparency, and reliability,” it is against the anti-touting provisions of the Securities Act of 1933 to fail to mention paid-for content. 

The Russian company neither admitted or denied the practice, but has still agreed to pay a civil penalty of $162,000 and damages of $106,998.

In addition, ICO Rating said it will not conduct such activities in the future. 

CNET: MoviePass reportedly left customers’ credit cards exposed online

“The securities laws require promoters, including both people and entities, to disclose compensation they receive for touting investments so that potential investors are aware they are viewing a paid promotional item,” said Melissa Hodgman, Associate Director of the SEC’s Enforcement Division. “This requirement applies regardless of whether the securities being touted are issued using traditional certificates or on the blockchain.”

The ICO boom appears to have died down in the past year, but these speculative events are still under intense scrutiny by regulators due to the high possibility of fraud and exit scams.

TechRepublic: Famous con man turned cybersecurity expert urges credit freezing

Last year, a New York judge ruled that ICOs fall under securities law and, therefore, SEC can go after scammers.

However, it is not just cryptocurrency scams that US departments are watching. In related news this week, the US Internal Revenue Service (IRS) has begun sending letters to cryptocurrency traders with revised tax estimates that include suspected, potentially undeclared virtual asset profits. 

Some of the revisions, which can be disputed, amount to thousands of dollars in unpaid tax. 

Previous and related coverage

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The United States Securities and Exchange Commission (SEC) has settled a fine with a Russian firm that was pushing initial coin offerings (ICOs) without disclosing the fact that it had accepted payment to do so.

Late yesterday, the SEC announced it has reached a $268,998 settlement with ICO Rating. According to the SEC, ICO Rating promoted cryptocurrency projects between December 2017 and July 2018 – the infamous boom period – that should have been classified as securities.

As a result, ICO Rating should have disclosed the fact that it accepted payment to promote some coins and tokens.

ICO Rating positions itself as “a rating agency that issues independent analytical research.” Perhaps ironically now in hindsight, the website also says its mission is “to help the market achieve the necessary standards of quality, transparency and reliability.”

It seems the company itself can’t even meet basic standards of transparency with this latest news.

ICO Rating has neither admitted nor denied the SEC‘s claims. However, it has agreed cease and desist from committing any future violations of the same nature. It also agreed to repay its ill-gotten gains and prejudgment interest totaling $106,998, and a civil penalty of $162,000.

Indeed, this news is hardly surprising. An investigation by Breaker last year, found that half of the crypto-media outlets they contacted would accept money to publish information about ICOs as if it were independent editorial content.

Published August 21, 2019 — 08:24 UTC

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ICO Rating, a Russia based initial coin offering and research firm, has paid a fine to the US Securities and Exchange Commission (SEC) regarding allegations that it failed to disclose payments received from issuers for publicizing their digital asset securities offerings.

According to a statement from the SEC, ICO Rating shall pay disgorgement of $100,572, prejudgment interest of $6,426, and civil money penalty of $162,000 for a total of $268,998 to settle charges.

According to the SEC, ICO Rating is based in St. Petersburg, Russia but has claimed in the past to have had offices in Singapore, New York, and Amsterdam.

“The securities laws require promoters, including both people and entities, to disclose compensation they receive for touting investments so that potential investors are aware they are viewing a paid promotional item. This requirement applies regardless of whether the securities being touted are issued using traditional certificates or on the blockchain.”

ICO Rating is but one of a good number of digital asset rating platforms – many of which have long been rumoured to accept money for ratings. Some, so-called, ICO advisors have also received remuneration to promote certain ICOs but to date, the SEC has not pursued any these individuals.

The SEC’s order finds that ICO Rating violated the anti-touting provisions of Section 17(b) of the Securities Act of 1933.

Without admitting or denying the SEC’s findings, ICO Rating agreed to cease and desist from committing or causing any future violations of these provisions.

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WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission said on Tuesday that it has fined and settled charges against a Russia-based ratings firm for failure to disclose payments it received to publicize digital asset offerings of issuers it had rated.

The regulator said that ICO Rating had not admitted or denied the SEC’s charges but had agreed to pay a nearly $269,000 fine for the so-called “anti-touting” violations committed between December 2017 and July 2018.

The firm also agreed not to break those rules in the future, the SEC said.

ICO Rating did not immediately respond to requests for comment.

The SEC has previously issued specific warnings about the promotion of cryptocurrency online fundraisers known as initial coin offerings (ICOs).

It is aiming to crack down on the array of ‘ICO agencies’ that offer crypto issuers active followers and posts on social media platforms such as Reddit and Bitcointalk. These can attract investors, given the lack of conventional financial information available on cryptocurrencies.

Some research houses accept payments in the cryptocurrencies they are analyzing and may give positive ratings for a price. Often the payments are not disclosed, a violation of securities law. Reuters reported on the phenomenon last year.

“The securities laws require promoters, including both people and entities, to disclose compensation they receive for touting investments so that potential investors are aware they are viewing a paid promotional item,” said Melissa Hodgman, a director in the SEC’s enforcement division.

“This requirement applies regardless of whether the securities being touted are issued using traditional certificates or on the blockchain.”

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With sustainability playing a more important role in everyday life more than ever before, we explain how blockchain technology will drastically improve current problems if it receives mass adoption. 

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In the last 10 years, there has been a dramatic increase in the number of businesses and consumers looking to become more sustainable. From supermarkets, energy providers, banks and consumer goods manufacturers, the shift to go green has become more prominent in everyday life.

Below we will examine how blockchain technology can play an integral role in tracking and improving sustainability measures. We will discuss how distributed ledger technology (DLT) could be a key method for businesses to track various core elements of their work and how this will affect consumers when they choose to shop.

Waste

In 2016, the entire planet produced over 2.01 billion tonnes of waste and, with that figure only expected to rise to 3.4 billion tonnes over the next 30 years, the waste problem the planet is currently facing needs to be addressed. In order to dramatically reduce this number, there will need to be a global infrastructure which is able to create, log and speed up processes; enter blockchain.

A 2017 study carried out by France’s national railway provider, the Société Nationale des Chemins de Fer Français (SNFC), found that Lyon’s central station produced over 360 tonnes of waste every year. The processes in place required the SNFC to use multiple firms to dispose of the waste at a great cost. 

The firm applied blockchain technology to its bins and used Bluetooth to track the capacity of each bin. This information was then logged and the wastage removal team were able to better allocate and dispose of the rubbish. In its first month of pilot testing, the SNFC found that it had saved close to €2,000. 

Whilst this number may not seem big at all, it plays a significant role in outlining how much train stations across France could in fact save. With over 3,000 individual train stations in France as of 2009, there is a potential to save over €64 million a year for the SNFC if each station saved €2,000. Of course, every station will have different waste levels, but even if this number was halved, the savings are still huge for the national rail service.

Although this system shows how existing waste is able to be disposed of, however, it does not account for the waste that will be created in the near future. One theory of how this waste issue could be combatted within product packaging is the idea of using QR codes. If packaging ends up in beaches, in the ocean or in an environment it should not be, these codes could be scanned and the packaging traced back to the manufacturers. It would then increase the responsibility that manufacturers, consumers and governments have to ensure waste is disposed of correctly.

The average household in the UK produces around one tonne of waste every year, with businesses in the UK accounting for a quarter of this waste. Other European countries such as the Netherlands, Switzerland and Germany recycle around 60% of all waste that is created. There is no doubt that recycling needs to be increased in the UK if both businesses and consumers in the UK are to improve the current waste situation. Integrating blockchain could ensure that this number is improved and both business and consumers understand the importance of recycling and waste management. 

Product Origin

One of the biggest issues that many consumers face when purchasing products is not knowing enough about its origins. In many manufacturing industries, such as fashion and natural resources, this level of transparency in product origin is simply not there. One of the biggest examples of this comes from the cotton industry.

Cotton, one of the most in-demand materials used to produce clothing, accounts for 33% of the textiles used. It also takes around 2,700 litres of water to cultivate enough cotton to produce just one T-shirt. Understanding the product origin could be helped with the use of blockchain technology.

The Seam, a Memphis based company which focuses on creating solutions for agricultural businesses, revealed it had partnered with the U.S. National Cotton Council to release a blockchain for the cotton industry. With over 453 tonnes of cotton sold and distributed each day in the U.S., blockchain will play a pivotal role.

This solution will help the cotton industry to track agricultural products from the source, as well as creating much-needed transparency in the sales tracking of cotton. Utilising the Ethereum blockchain, each bale of hay will be tracked using a non-fungible token to represent it. This token will be unique, outlining the key characteristics of each hay bale such as weight, quality and purpose, for example, if the hay is better for linen, denim etc. 

Levi’s Strauss & Co. has already committed to rolling out blockchain technology in its factories in order to better increase its efficiency. LVMH Moët Hennessy, the parent company of fashion powerhouse Louis Vuitton, has also begun using blockchain in order to track authentic products. 

Blockchain, in this case, is a perfect example of how product origin can be tracked, traced and made available to the key parties. It also stresses the importance of transparency and, in the fashion industry, transparency is vital in understanding the impact and authenticity of the products life cycle. 

Supply Chain

One of blockchains biggest benefits is the immutable, time-stamped database which logs every transaction that happens. For a business with a supply chain, this would prove invaluable to creating a much more streamlined, cost-efficient and waste-reducing network at every step of the way. In order to understand just how this would work, it is better if we provide an example.

In September of last year, the U.S. experienced a dramatic outbreak of E. coli which was caused by contaminated romaine lettuce found in Arizona. The outbreak caused over 210 people to fall ill, 96 of which ended up in the hospital and five of whom died. When the Food and Drug Administration (FDA) began its investigation into finding the source of the bacterial outbreak, they found themselves gathering an enormous amount of information. 

This eventually led to them to a farm in Yuma weeks after the outbreak occurred and after the infection had been contained. Being able to outline exactly where all of the product was coming from, highlight all processes in the network, timestamp each transaction and then find a commonality between all those who became ill would have made the FDAs work much faster.

When looking at supply chains, using DLT makes complete sense. Had a blockchain been in place for the FDA to track where all lettuce was coming from and traced this back to the Yuma farm, then they would have found the source of the E. coli almost instantaneously. Current archaic systems rely too heavily on human interaction and, without the help of blockchain, highlighting the issue early on was not possible for the FDA. 

Societal Impact

Climate change and sustainability have become two of the major talking points of 2019 alone. Activists such as Greta Thunberg have highlighted the importance of making a global change before it is too late. In order to avoid a hothouse earth scenario, we must reduce global greenhouse gas emissions by 55% before 2030. This impacts future generations on an incomprehensible scale.

There are ways in which blockchain could create a greater societal impact than technologies currently in place. For example, DOVU is rewarding individuals who reduce their carbon footprint by giving them tokens. They recently integrated the DOV wallet with Uber’s public API and users of the DOVU app can use the DOVU tokens they have earned to reduce the price of their Uber journey. 

Almond, a B Corp which rewards users for buying responsible brands and helps them understand and reduce their carbon emissions, is changing the way in which people shop. Users of the Almond App are able to scan products and find out more about the product, its journey and the effect it has on the planet. 52% of individual carbon emissions come from the products we buy, a staggering statistic. 

At a macro level, blockchain could play a much more integral role in terms of changing the way in which whole countries, governments, industries and individuals are able to see the effect their behaviour is having on the environment. 

A larger use scale of blockchain would be creating a decentralised and sustainable resource management platform. If every house in the UK was placed on the blockchain and represented as an individual token it could change the way utility bill data is exchanged. By using sensors which indicate, for example, how water usage differs in each household, this data could then be sent to the providers and help them to make informed decisions on how much resource needs to be distributed to the area. 

Of course, some of these examples are still far away, but not completely out of reach. Blockchain marks the start of an exciting time in the world as we know it and its societal impact should not be overlooked. 

Final Thoughts

As sustainability becomes an ever-important part of everyday life, blockchain could help to facilitate some of the key change that is needed. In order to create a more transparent, streamlined and accountable system for businesses, consumers and countries to adhere to. By doing so, blockchain could be a key part of reducing emissions and waste as well as improving on the manufacturer and consumer problems which we discussed. 

More importantly, blockchain has the potential to create a new societal awareness and reward those who choose to act more sustainable. It will, in theory, help to build a framework which we understand how our carbon emissions work, educating us on our personal effect on the planet. We at TokenMarket look forward to seeing how blockchain will help to usher in a new wave of educated businesses, consumers and governments.

Source: TokenMarket News
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