Login
Contact Sales
Login
CONTACT SALES
5 Takeaways from the SEC Statement on Digital Asset Securities Issuance and Trading

5 Takeaways from the SEC Statement on Digital Asset Securities Issuance and Trading

by | Dec 4, 2018 | Compliance Updates, iComply Insights

Recently the U.S. SEC’s Division of Corporation Finance, Division of Investment Management and Division of Trading and Markets released a statement following the enforcement actions against companies Airfox, Paragon, CryptoAsset Management, TokenLot, and the founder of EtherDelta.

The statement began with a clause emphasizing that while it encourages such advancements, these individuals and companies must still adhere to the federal securities laws that govern the nation when they are applicable.

The issues touched on in the statement fall into the below categories:

  • Initial offers and sales of digital asset securities
  • Those who advise others about investing in digital asset securities
  • Investment vehicles investing in digital asset securities
  • Secondary market trading of digital asset securities
  • Reporting standards for issuers of digital assets

Here are five key takeaways from the Commission’s statement:

  1. Read, Repeat and Remember these Two Questions

When is a digital asset a security for purposes of the federal securities laws?
If a digital asset is a security, what commission registration requirements apply?

Under the first category, Initial Offers and Sales of Digital Asset Securities, the Commission states all of their actions to date have focused on these two questions, and both AirFox and Paragon received settled orders from the Commission due to lack of compliance with federal securities laws relating to these questions.

The Result? Their unregistered offerings of tokens have resulted in both companies:

  • Paying penalties
  • Receiving requirements to register the tokens as securities under Section 12(g) of the Securities Exchange Act of 1934
  • Being required to file periodic reports to the Commission
  • Being required to compensate investors who purchased tokens if they choose to make a claim
  1. The Crypto Asset Management Order

The Crypto Asset Management order was given to a hedge fund manager for failing to comply with federal securities law. Not only did the hedge fund manager fail to properly register the fund as an investment company but also knowingly made misleading statements to investors in the fund, violating anti-fraud provisions of the Investment Advisers Act of 1940.

The statement moves on to address the facilitation of electronic trading due to the advancements in blockchain and distributed ledger technology.

  1. Exchanges

“Any platform that promotes trading of digital asset securities between two parties” is an “exchange” and must register with the Commission as a national securities exchange or be exempt from registration.

EtherDelta’s founder received an order for failing to register the platform as an exchange. In the Commission’s eyes, EtherDelta served as a hub (or marketplace) for buyers and sellers of digital asset securities.

In this case, the Commission stated this was a CLEAR violation. EtherDelta’s choice to represent themselves through distributed ledger technology does not eliminate the fact that they essentially operate as an exchange.

  1. Even Though You May Not Be an Exchange, Broker-Dealer Registrations Are Still Required

The Commission’s order to TokenLot stated that the company was a self-described “ICO Superstore” which legally exemplifies as a broker-dealer relationship. Though not necessarily an exchange, TokenLot facilitates transactions in digital asset securities and under the Exchange Act is required to register as such.

  1. Legal Counsel Concerning the Application of Federal Securities Laws is Recommended

The statement concludes with encouraging words to the community about their support of innovation but also highly recommends that any entity employing new technologies seek legal counsel around the area of federal securities laws, and contact Commission staff, as necessary, for assistance.

Ultimately, what can be gained from this statement is that the U.S. SEC has taken proactive steps toward correcting the current Token landscape to ensure that Tokens are functioning legally and ensuring investor protection. Security token offerings (STOs), exchanges, broker-dealer relationship platforms and investment vehicles investing in digital asset securities should make registration and compliance a priority to avoid strong penalties similar to those faced by Airfox, Paragon, CryptoAsset Management, TokenLot, and the founder of EtherDelta.

Learn how iComply can help you adhere to global compliance, securities, AML, and privacy regulations in over 150 countries.

About iComply Investor Services Inc.
iComply Investor Services Inc. (iComply) is an award-winning software company focused on reducing regulatory friction in the capital markets. With powerful data, verification, tokenization solutions, iComply helps companies overcome the cost and complexity of multi-jurisdictional compliance to effectively access new markets. Learn more: iComplyIS.com

Andrew Weiner, Business Development

by | Dec 1, 2018 | Team

Andrew Weiner, Business Development

Andrew Weiner brings a wealth of knowledge to the Business Development team at iComply, with over 15 years of sales and account management, CRM, and talent development experience.  Andrew studied Journalism at Ryerson University and is currently studying Computer Science at Simon Fraser University. 

iComply Releases OFAC Screening For 6 Major Cryptocurrencies

iComply Releases OFAC Screening For 6 Major Cryptocurrencies

by | Nov 29, 2018 | Press Releases, Updates

iComply Offers OFAC Screening for Sanctioned Bitcoin and Crypto Addresses

On November 28, 2018, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) added its first bitcoin addresses to its public list of sanctioned individuals and entities. iComply is capable of screening these addresses to ensure compliance for decentralized finance and assets

Vancouver, B.C. – November 29, 2018 – iComply Investor Services (“iComply”), a leading RegTech platform for global digital finance and cryptocurrencies offers comprehensive blockchain forensic screening to address risks related to blockchain addresses, including sanctions screening, fraud, theft, and cyber-security.

On November 28, 2018, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) added multiple Iranians and their bitcoin addresses to the Specially Designated Nationals (SDN List) for laundering the bitcoin proceeds from the infamous SamSam ransomware scheme. This is the first instance of OFAC adding a cryptocurrency address to their public list of sanctioned individuals and entities.

“Agencies such as OFAC protect the integrity of financial markets, warning companies about individuals or companies that may pose a risk to their business. We developed our RegTech software, iComply, to make it possible to screen for these kinds of threats in both centralized and decentralized finance to address the unique risks when financial assets are traded using public blockchains. Currently, our solution supports Bitcoin, Ethereum, Ethereum Classic, Litecoin, Dash and Bitcoin Cash,” said Qayyum Rajan, Chief Data Officer, of iComply Investor Services Inc.

iComply’s solution addresses risks related to blockchain addresses and the trading of financial assets using public blockchains, this is an integral process that is complementary to traditional AML/KYC for fiat. Institutions can query addresses to achieve financial grade compliance around the individuals and entities that it transacts with.

“As blockchain is increasingly used for mainstream finance, it is integral to enforce regulatory compliance not just for the individual and entity but also for the transactions themselves,’ added Rajan. “While there has been a lot of talk about the Howey test to determine whether a token is subject to securities laws, institutions such as OFAC are now also enforcing criminal liabilities once these assets are trading.”

-##-

Looking for financial grade KYC and AML in an enterprise ready API?

iComply offers global screening for humans, corporations, and blockchain transactions in a single REST API.

Book a demo with one of our specialists to learn more.

About iComply Investor Services Inc.
iComply Investor Services Inc. (iComply) is an award-winning software company focused on reducing regulatory friction in the capital markets. With powerful data, verification, tokenization solutions, iComply helps companies overcome the cost and complexity of multi-jurisdictional compliance to effectively access new markets. Learn more: iComplyIS.com

U.S. Justice Department Uses Blockchain Forensics In 13-Year Jail Sentence

U.S. Justice Department Uses Blockchain Forensics In 13-Year Jail Sentence

by | Nov 26, 2018 | Compliance Updates, iComply Insights

U.S. Justice Department Uses Blockchain Forensics In 13-Year Jail Sentence

A woman in New York was sentenced for funding ISIS through a virtual asset payment processor.

What Happened?

November 26, 2018: Zoobia Shahnaz, from Long Island, was caught providing material support of over US$150,000 to known ISIS-fronts in the countries of Pakistan, China, and Turkey.

Zoobia fraudulently acquired credit card numbers and used them online to purchase over $60,000 worth of bitcoin (BTC) and other cryptocurrencies between March and June 2017. The funds were transmitted via wire transfer.

Zoobia was apprehended at John F. Kennedy airport in July 2017 while attempting to board a flight to Istanbul. Authorities suspect she was trying to find a backdoor into Syria to join ISIS.

Source: https://www.justice.gov/opa/pr/new-york-woman-pleads-guilty-providing-material-support-isis

Who Is Impacted?

Payment processors facilitating virtual asset transactions.

Why This Matters?

Authorities today are using blockchain analysis tools to trace the origin and transfer history of blockchain assets, including cryptocurrencies like bitcoin. These tools, when used to identify the source of funds, are capable of fighting fraud and the financing of terrorism, like in the case of Zoobia Shahnaz from New York.

Anyone participating in the value-chain of digital assets plays a role in combatting this kind of online fraud. Trading Platforms, Payment Processors, OTC Brokers, and Money Services Businesses bear the responsibility of identifying their customers, monitoring their transactions, and reporting suspicious activity.

What’s Next?

With the appropriate KYC and AML tools in place, fraud by stolen credit card can be prevented in the future. Had a live face match been performed on Zoobia when she tried to use someone else’s stolen personal credit information, it is unlikely she would have able to acquire the cryptocurrency she used in her scheme.

learn more

Is your AML compliance too expensive, time-consuming, or ineffective?

iComply enables financial services providers to reduce costs, risk, and complexity and improve staff capacity, effectiveness, and customer experience.

Request a demo today.

New University Research: The Compliance Trilemma

New University Research: The Compliance Trilemma

by | Nov 19, 2018 | iComply Insights, Press Releases

A research team from the University of British Columbia (UBC) conducted more than 45 interviews and dozens of observations from industry experts to explore the past, present, and expectations for the future of token issuers from diverse perspectives.

iComply Investor Services commissioned a study to better understand the challenges that token issuers face to meet the regulatory standards for issuing and tracking digital assets. Currently, these projects face significant barriers that result in trade-offs that hinder the true potential of blockchain managed assets. The research collaboration was supported by Mitacs’s Accelerate Program.

The Findings:

The use of blockchain technology allows token issuers to efficiently gain access to global customers, partners, and capital.

Key Challenge: The burden of the cost of regulation

Challenges broadly stem from the cost of complying with regulation. In 2017 there was significant ambiguity surrounding whether and how digital assets were regulated, and many issuers neglected this dimension altogether. While a large number of issuers were well-intentioned, others could not resist exploiting the prospect of unlimited access to global investors. Early offerings could often raise more with savvy marketing than a well-reasoned project plan, and a large number of early token offerings were little more than Ponzi schemes. Today, regulatory clarity and enforcement are essential if tokenized securities are to become a safe and legitimate fundraising mechanism.

The study found that issuers currently face a compliance trilemma, whereby they can realize only two of the following three goals in their token offerings:

  • Cost-effectiveness
  • Widely distributed investors
  • Regulatory compliance

While we focus here on ICOs, the compliance trilemma also holds more generally for other decentralized finance practices involving cryptoassets including ICOs, STOs, TGEs, and IEOs.

To date, issuers have adopted various approaches to address the trilemma:

  • Sacrificing compliance by directly defying regulators and hoping to fly under the radar
  • sacrificing the scope of investment by restricting token sales to a limited group of investors
  • Compromising on all three dimensions in a hybrid approach
  • Forgoing a token offering entirely until this becomes more cost-effective

However, each of these current approaches is sub-optimal, and a solution is needed to the compliance trilemma.

The study also explored how industry experts expected the compliance trilemma to be resolved and found that the majority tended to advocate new regulatory rules and definitions that could relax what they see as the “burden” of compliance on issuers. Such an approach places the onus squarely on regulators, who would need to coordinate within and across jurisdictions to reach a coherent regulatory framework that appeases the challenges and costs of compliance for issuers. However, we argue that holding regulators solely accountable for the compliance trilemma is incomplete and misguided, and that other approaches are needed to reduce the costs and uncertainties of regulatory compliance.

 

Read the research by downloading the report here

 

About iComply Investor Services Inc.
iComply Investor Services Inc. (iComply) is an award-winning software company focused on reducing regulatory friction in the capital markets. With powerful data, verification, tokenization solutions, iComply helps companies overcome the cost and complexity of multi-jurisdictional compliance to effectively access new markets. Learn more: iComplyIS.com