FATF Prepares Massive Changes for Virtual Asset Regulation

FATF Prepares Massive Changes for Virtual Asset Regulation

During May 6-10, 2019, the FATF (Financial Action Task Force) held a private sector consultation on new AML policies related to “virtual assets” and “virtual asset service providers.” Representatives including regulators, financial intelligence units, financial institutions, and even a few blockchain companies provided both regulatory and industry insights on the proposed changes. As a regtech firm for fintechs, the iComply team provided a unique voice at the plenary, advocating on behalf of our clients and users. 

The FATF is the global oversight body for AML regulators around the world. In short, they regulate the regulators. The new FATF recommendations (specifically, 15 and 16) will impact how regulators define virtual assets, regulate virtual asset service providers, and enforce transaction-level audit trails. 

While the new FATF recommendations cover a much broader set of regulations, there are three key areas that will have the greatest impact on blockchain or cryptocurrency powered fintechs.

  • The definition of “Virtual Assets” casts the net widely, covering nearly all fungible, purchasable, and tradable digital assets. The regulations of virtual assets will be viewed in the same way cash is today. Non-fungible assets, such as ERC721 tokens, in certain use cases, may present opportunities to avoid being caught under the virtual assets definition.
  • The definition of “Virtual Asset Service Providers” (VASPs) encompasses any individual or corporation that holds virtual assets or the private keys to virtual assets on behalf of another party. Entities operating within the scope of a VASP today will need to review their core activities, such as promotion, distribution, custody, transfer, exchange, etc., for new reporting obligations. Interestingly, these new regulations may also drive the industry towards fully non-custodial Dex technology which was excluded from the policy discussions.
  • Recommendation 15.7(b) was by far the most controversial and highly contested policy discussed at the event. While the requirements of R.15.7(b) may be easily solved with a wide variety of technologies, adopting any standard will require global industry collaboration; the primary solutions presented during the meetings present massive risk and liability in the areas of privacy and identity regulations  in addition to questions of power, control, privacy, and the use of personal information.

R.15.7(b) attempts to “copy and paste” funds-transfer regulation onto the transfers of digital assets. This would require any virtual asset service provider to report the beneficiary and originator of any virtual asset transferregardless of size or jurisdictionthrough a database or data framework shared between the regulators and the market.

Aside from the new regulatory proposals, the plenary’s discussion focused on a much larger conversation: who determines the balance among privacy, digital identity, and market integrity regulations?

Some countries, such as the United States and Japan, showcased their own solutions for a centralized global data repository as presented by Verasign and Softbank, respectively. Here is a screenshot from one proposed solution, an “Equifax for virtual asset transactions”.

Big Data, Privacy, and Market Surveillance

Technically speaking, the ability to create a single, globally-centralized database housing the name, account number, home address, all wallet addresses, and the transaction number of every virtual transaction ever created is not difficult…until you get into the specifics of who has the power to control and access this data. 

More challenging than simply creating a global data repository is gaining market adoption. The virtual asset (a.k.a. cryptocurrency) industry has had difficulty with this to date. Threats of blockchain forks, or competitions over which chain best reflects the original vision of Satoshi Nakamoto, have created a fledgling industry full of tribal feudalism. 

Furthermore, establishing policies, best practices, or open source standards for maintaining the records of beneficial ownership and source of wealth for every cryptocurrency transaction opens a Pandora’s Box of questions regarding privacy, consent, GDPR, PIPA, and geopolitical power struggles. 

From cybersecurity, privacy, and data protection perspectives, handing over the power and control of both the identity and transactions of all public blockchains to a small handful of major corporations seems flawed from the start. While these honeypots of data are easy to create, they pose significant threats and potential harm to the trust and integrity of decentralized financial markets globally. 

 

Shared Standards and Interoperability

Luckily decentralized technology such as blockchain also presents viable solutions ─ many of which are already in use in the market today. Applied correctly, public blockchain technology can do a significantly better job of protecting the rights and privacy of a user while meeting AML obligations ─ provided the blockchain industry can agree on and implement a shared standard in time.

Simply using a public blockchain doesn’t prevent the ultimate aggregation of power and control if it is not done in an open, transparent, and decentralized manner. Solutions such as iComply’s Wallet Ownership Verification already address one part of the problem. Decentralized or self-sovereign identity solutions could solve other pieces, but they still leave significant gaps to fill.

All in all, the viability of public blockchains in regulated finance will come down to whether the industry can agree to establish and adopt standards for consent, privacy, and data sharing. As a leading regtech provider, and the only digital identity or asset tokenization solution invited to the FATF plenary, we at iComply considered it our duty to help raise awareness of the need for balanced regulations and enforcement policies that take a more holistic view of compliance; for example, how do we balance the requirements of R.15.7(b) with the requirements of MIFID, GDPR, or PIPA? 

Despite the challenges they present, these shifts in the regulatory fabric of global digital finance also present a number of exciting opportunities for the industry.

  • Early Adopters who successfully implement the new requirements stand to gain market share and increased scalability, while their late-to-the-game competitors struggle to catch up. Since the dawn of the computer, advancements in technology have created new regulatory problems to tackle; and adopting a shared standard for interoperability has proven highly effective. Stock exchanges globally run on the FIX protocol, identity standards are benchmarked against the FIDO protocol, and the first 200 correspondent banks to adopt SWIFT set the global standard. While there remains much debate whether these new regulations are over-reaching, it is unlikely that this will reverse these new changes before the industry implements solutions.

     If you are interested in contributing to this conversation, contact us.

  • Payment Services and Virtual Asset Exchanges will see several major changes to how they operate, with significant variations in reporting requirements or regulatory oversight by jurisdiction. This gets even more complex where an exchange is engaged in the issuance of utility or security tokens. The silver lining to these businesses is that compliance with these new regulatory requirements is one of the final technological hurdles for blockchain-powered exchanges and payments businesses to enter into the more lucrative institutional markets. 

 

  • OTC Brokers and Trading Desks, including individuals facilitating OTC transactions, will be impacted significantly by the new compliance requirements these regulations will have on daily operations. However, in our conversations with iComply clients and partners who operate in the OTC market, the adoption of technology to meet regulatory requirements presents a larger opportunity, as the disclosure of beneficiary and originator data on an OTC transaction will remove significant instances of fraud, lost deals, and shady OTC agents throughout the industry as a whole. 

While the new regulations will see some variations as each jurisdiction begins implementing these AML requirements, iComply is dedicated to supporting our clients and partners as we navigate these changes.

Many fintech businesses now have questions about how these new regulations may impact their compliance program, competitive position, or ability to scale their business in the face of these new requirements. 

Click here to speak with an iComply representative if your business is interested in joining the discussion of virtual asset regulation, or if you have questions on how your business can best position itself to achieve compliance in an evolving regulatory landscape.

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

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Central Banks and Public Blockchains

Central Banks and Public Blockchains

The use of blockchain has been said to provide massive benefits for financial institutions but what real progress has been made? Sure, firms such as JP Morgan have been playing with private chains such as Quorum and Hyperledger for years now, does this mean that public chains are a no-go for regulated financial institutions?

Not at all. In fact, one of the major shifts due to blockchain and DLT that we anticipate over the long term is both the consolidation and vertical integration, of the financial services sector. Licensed broker dealers are beginning to add digital assets to their workflows. Money services businesses such as Bidali offer preferential rates to settle transactions using ERC20 stablecoins rather than expensive and time consuming bank wires. 

These players are on the front lines of engaging the end customer of financial services. Deep in the back offices of financial services, we see central banks around the world both piloting and incorporating public blockchains – most notably Ethereum – into key business processes. 

Here is a recap of central bank action from Q4 2018:

The Singapore Stock Exchange (SGX) in Q4 2018 launched a platform for settling tokenized securities across multiple blockchain platforms. This came out of coordinated central bank efforts to streamline processes and focused on post trade processing only.

As a follow up to Project Ubin – launched by the Monetary Authority of Singapore –  the Bank of Canada partnered with the TMX Group and Payments Canada to launch Project Jasper. Continuously, we are seeing how savvy, and pragmatic, these institutional players are in their application and adoption of distributed ledger technology. The project was run on Ethereum, Corda and Hyperledger.

Other Central Bank initiatives exploring blockchain infrastructure:

More directly related to iComply, several Central Banks in North America and Asia are beginning to explore the use of blockchain forensics to monitor money-laundering, terrorist financing, and fraud on major blockchains such as Bitcoin, Ethereum, Litecoin, Dash, and others.

This is critical because most central banks have AML policies that will restrict the adoption of public blockchain transactions (such as the Bank of Canada and Bank of Singapore) without properly screening for the source of funds on the digital assets they uses to transact.

While we have yet to see a central bank issue their own stablecoin, this is likely just a matter of time.

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

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iComply MasterClass: Understanding and Mitigating Risks in Crypto

iComply MasterClass: Understanding and Mitigating Risks in Crypto

In this upcoming MasterClass hosted by iComply, BitAML’s Founder Joe Ciccolo and Coinstructive’s CEO Chris Groshong join iComply’s Head of Product Strategy Greg Pinn to discuss the importance of understanding and mitigating your company’s risk in crypto compliance and AML screening.

Compliance tends to be one of the larger knowledge gaps for modern business management; closing this gap is not only essential to the success of your business, it’s also the law. Our expert panel will discuss the areas of risk that your business could be subject to and the challenges associated with non-face-to-face transactions. Find out what can be done to mitigate these risks, and learn why regulators will no longer buy ignorance as an excuse for non-compliance.

Save Your Spot: Registration Limited to the First 100 People
Date: Tuesday, February 5th
Time: 10:00 AM – 11:00 AM (Pacific Standard Time)

Key Learnings:
In this MasterClass, the panel will break down the existing risks surrounding digital transactions and what steps you can take to mitigate these risks in order to protect your company and your investors.

About Greg Pinn — Head of Product Strategy, iComply
Formerly the head of World-Check (Thomson Reuters’ most profitable company), Greg Pinn led product strategy for almost ten years—both before and after its $560-million acquisition by Thomson Reuters. World-Check is described as the “cornerstone of the Thomson Reuters risk business” and is the #1 compliance software for KYC, AML, ATF at Tier 1 and central banks globally. Greg’s experience in risk, governance and compliance analysis, product strategy, and leadership of large global development and sales teams were critical to World-Check’s success and now support him in his role to ensure iComply’s brand delivers confidence, trust, and security to all stakeholders.

About Joe Ciccolo — Founder, BitAML
Before founding BitAML, Joe Ciccolo spent over a decade in high-impact roles with leading institutions such as State Farm and Citizens Financial Group. He was a founding member and architect of a Bank Secrecy Act / Anti-Money Laundering program for one of the top 100 online financial institutions in the U.S., and worked as a project manager for a top-20 international bank, managing regulatory and AML audit remediation projects. His additional leadership experience includes risk management, vendor due diligence, fraud prevention, and corporate investigations. Joe regularly consults with bankers regarding the onboarding of Bitcoin customers, as well as complex cryptocurrency-related investigations involving federal and local law enforcement. He is a frequent speaker at cryptocurrency, payments, and compliance industry events and volunteers his time at the non-profit organization Blockchain Education Network.

About Chris Groshong — President & CEO, CoinStructive
As President of CoinStructive, a Bitcoin & Blockchain consulting firm in San Diego, Chris Groshong has developed a nationwide team that is furthering the development of cryptocurrency and blockchain adoption. With a focus on clarity, CoinStructive provides an obstacle-free transition for businesses and enterprises who are interested in using cryptocurrencies or blockchain tech as part of their business strategy. They are solutions architects and problem solvers and help fill the gaps in your business model. CoinStructive’s fundamental goal is not only to help organizations reach theirs but also to do so in a way that empowers founders, boards and entrepreneurs to make educated, well-informed, and confident business decisions.

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

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Why Do We Need AML?

Why Do We Need AML?

Within the crypto community, many people express negativity toward KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures. There are a variety of reasons for this, but much of this stems from the underlying reality that the results of Suspicious Activity Reports (SARs) are never publicized.

The existing legal framework does not allow for the release of SAR details, leading some people to believe that the system fails at its task of reducing financial crime. Unauthorized disclosure of a SAR is a federal crime with significant penalties.

These confidentiality rules apply to financial institutions as well as their current and former directors, officers, employees, agents, and contractors. Beyond financial institutions, SAR confidentiality also applies to government agencies.  

Why all the confidentiality?

“Unauthorized disclosure of SARs could undermine ongoing and future investigations by tipping off suspects, deterring financial institutions from filing SARs, and threatening the safety and security of institutions and individuals who file such reports.”

This is very similar to whistleblower rules and anonymous tips. To encourage individuals and entities to report illegal activities, they must be ensured of protections from those they are reporting. Without those protections, reporters may be too fearful to report, causing significant harm to investigations.

This poses a formidable challenge: how do financial intelligence units (FIUs) like FinCEN encourage reporting while being able to protect the reporters? The answer today is a combination of requirements for reporting along with penalties for failure to report.

Unfortunately, many in emerging financial markets see this government black box as suspicious. FinCEN’s success stories are vague—remember, the purpose for this is confidentiality—and do not show a clear path from the SAR through law enforcement agencies to indictment.

What, then, happens with the more than 2 million SARs filed each year with FinCEN?  

FinCEN provides both direct and indirect access to law enforcement throughout the United States and with countries of the Egmont Group. These law enforcement agencies use the FinCEN data to help build existing cases or open new cases against financial criminals and criminals engaged in crimes with financial benefit as listed in the BSA (Bank Secrecy Act), the USA PATRIOT Act, and by FATF (Financial Action Task Force).

These crimes include terrorism and terrorist financing, insider trading, money laundering, tax crimes, human trafficking, sexual exploitation of women and children, extortion, counterfeiting, bribery and corruption, organized crime, drug trafficking, and many others.

The data submitted by a financial institution through a SAR is unlikely to be an entire case, but might be a key piece of evidence in bringing charges against these sophisticated criminals. Without the support of financial institutions in reporting this data, many of these crimes would go undetected or unprosecuted.

Financial institutions play a key role in assisting law enforcement in identifying and prosecuting financial and terror-related crimes. Without the efforts of AML and KYC professionals around the world, identifying and preventing such crimes would not be possible.

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

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Seven Myths About Security Tokens

Seven Myths About Security Tokens

As blockchain technology continues to mature, issuers today can launch a security token more efficiently than ever. However, while there are many tools on the market that can help you issue a token as a security, most of these tools fall short, leaving issuers to handle the liability and token compliance on their own once the asset has been sold.

This article should not be considered legal advice, but will hopefully shed light on a few important questions as well as examine seven key myths that we see persist among management teams planning to issue a token.  

1. Securities Legislation Targets Issuers

Securities legislation doesn’t exist to make the life of an issuer difficult—tokenized security or otherwise. Regulators have a duty to ensure market stability and, more importantly, investor protection. This means that what matters to regulators is not whether the issuing business is headquartered in the U.S., Singapore, Switzerland or anywhere else, but rather whether a U.S. citizen is able to own the asset. The responsibility falls on the issuer, as well as their advisors, to ensure that their tokens are not held by U.S. investors.

2. Compliance Continues After The Sale

Compliance is not about checking off boxes—it isn’t a form or application that can be filled out, submitted, and later tossed into the trash never to be seen again. Compliance is an active and stringent regulatory mechanism that is favourable to both issuers and investors.

This is easier to manage when assets are controlled by broker-dealers or other centralized entities but becomes increasingly difficult to manage when these assets are decentralized, moving peer-to-peer or being exchanged on one of dozens of crypto exchanges. Research shows that $2.5 billion of dirty Bitcoin alone has been laundered through these platforms.

The token launch market has had an especially hard time with this concept, as many ICO and STO platforms claim to help you with launching your token or coin, often brazenly plastering “compliant” across their sites and messaging without following these regulations themselves. Once your project has created and issued a digital asset, it is your responsibility and liability to ensure it stays compliant with regulations in perpetuity.

iComply offers compliance solutions for token issuers, including KYC/AML,
audited smart contracts, and access to leading legal, tax, and
business development support for over 150 countries.

3. The Reach of A Regulator Stops at the Border

While issuers have free rein on where they plan to launch their token, even more critical is where the investor is located and whether or not the token is considered a security by the standards of the regulatory bodies in question. (It is not based on whether the issuer decides to name it an ICO, TGE, STO, or otherwise.)

If the SEC determines the token is indeed a security, very likely action will be taken sooner or later to protect U.S. investors. Potential steps towards remediation may include rescission offers, forking or burning problematic tokens, and self-reporting to the SEC. The tokens created in traditional coin offerings are simply not capable of meeting these requirements and may need to be replaced or rehabilitated before they can continue to be traded without regulatory action.

Did you launch a token that is now facing regulatory action?
iComply offers compliance rehabilitation software to transform previously issued tokens into compliant security tokens.

Interestingly, the SEC’s very first investigation into blockchain finance was of The DAO, an entity situated outside U.S. borders. As such, issuers should have a strong understanding of jurisdictional boundaries and the movement of tokens on peer-to-peer networks (including secondary trading); once a token has been issued to an investor, the responsibility of that token remains with the issuer.

4. I Have a Legal Opinion Letter

The Howey Test, developed in 1948, is the standard the SEC uses to determine what is considered a security and what is not. Certain metrics of the Howey Test, such as ‘the expectation of profit’, are centered on the expectations of investors rather than those of the issuers. Some of the critical factors with the potential to create an expectation of profit are:

  • selling the token at a discount (i.e.: during the presale),
  • using a fungible token, such as an ERC20, versus the non-fungible ERC721, and
  • listing the token on an exchange for secondary trading.

The hard reality is that a simple opinion letter stating why your lawyer thinks your token is not a security bears little weight when (not if) your token or coin is audited by regulators. While regulators in various markets may use slightly different tests, the fundamentals are often quite similar. It doesn’t matter what you call it . . . as the saying goes, if it looks like a duck and quacks like a duck, it just might be a security token.

5. The Best Advisors are Credentialed Experts, Gurus, and Influencers

While experts, gurus, influencers, and advisors abound in the blockchain industry, many of the best resources available tread much more carefully. Top securities lawyers have struggled with the nuances of structuring sound offerings, and experienced accountants have only recently begun to achieve clarification on FIFO vs LIFO (First In First Out vs Last In First Out).

In a market this young, there are few players who can provide the extensive legal knowledge required to navigate the space. This does not mean consultants aren’t available, but rather that due diligence is critical, and it is imperative that the team you build around your offering have the resources and experience to make your token offering successful.

Despite this uncertainty, many of these service providers have been taking on clients in droves, not because they have the expertise but because of a booming market and the opportunity to make good money. Unfortunately, an opinion letter from your lawyer will not protect you; issuers are still liable, and a lawyer will (often) be more than willing to continue collecting legal fees in order to represent that same client, should things go awry. 

6. We Can Wait for the Regulators to Catch Up

As we saw when Mark Zuckerberg, in his testimony to Congress, explained some of the most basic elements of Facebook to a perplexed room of lawmakers, technology clearly has the ability to advance far faster than the laws that govern it. So it is unsurprising that new laws and regulations have not yet been created to solve these problems. Lawmakers and regulators must navigate this uncharted territory with caution.

There have been countless demands for regulators to define a new global framework for tokens—alas, it seems unlikely that a consensus will be reached anytime soon. Fortunately, technology can be used today to achieve the same result by enabling decentralized assets to adhere to current regulations.

We created the iComplyICO platform and Prefacto™ technology to meet this need, to automate and decentralize these processes, providing efficiency and a global reach of decentralized finance while maintaining the compliance standards of traditional finance. If you are looking to launch a token, you can use the iComply platform to manage an unlimited number of offerings, access professional advisors, and connect with investment partners.

7. If It is Not a Security, It is Not Regulated

This may be one of the most prevalent myths about token offerings today. The truth is that the SEC’s jurisdiction is securities. If it is not a security, then what is it? A smart contract could represent rights—or be the actual asset itself—to a security, commodity, or consumer good. Each of these comes with their own regulatory restrictions.

However, regulatory oversight and legislation are only a small piece of the legal puzzle. In the U.S., multiple law firms have filed class action lawsuits on behalf of investors for violations of the Securities Act, and the SEC has begun taking action on those issuers selling unregistered securities, committing fraud, false advertising, and more. While companies that issued their tokens in the early days of the craze did not have decentralized compliance solutions available to them, issuers today do.

Looking Forward

While this list is far from exhaustive — and should not be construed as legal opinion or advice — it details some of the aspects of token issuance that you should be mindful of as you consider this exciting new technology as a way to raise capital, engage your community, and reach new markets.

For these new and future issuers, we are likely to see more and more tokens issued in compliance with current regulations, unlocking the doors to institutional investment, larger raises, and more innovative ideas reaching fruition worldwide. Onwards!

Looking for an end-to-end token management studio?

iComply’s token compliance platform, Prefacto enables issuers to capture the value of blockchain asset management with multi-jurisdictional compliance automation for over 150 countries.

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

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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

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

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Risk Management Strategies for AML Compliance
Risk Management Strategies for AML Compliance

Effective risk management is essential for Anti-Money Laundering (AML) compliance. Financial institutions must identify, assess, and mitigate AML risks to prevent money laundering and ensure regulatory compliance. This article...

Global AML Regulations: What You Need to Know
Global AML Regulations: What You Need to Know

Anti-Money Laundering (AML) regulations are critical for financial institutions worldwide to prevent money laundering and other financial crimes. This article provides an overview of global AML regulations, highlighting the key requirements and best practices to...