Crypto Regulation Update — December

This update is brought to you by Bridge Protocol (TOLL) as part of a series on cryptocurrency regulations.

Bridge is a RegTech company specializing in identity services and compliance for Know-Your-Customer (KYC), Anti-Money-Laundering (AML) and more on the blockchain.

Read last month’s update here.

United States

  1. Ohio becomes the first state to accept bitcoin for tax payments. Companies that want to take part in the program simply need to go to OhioCrypto.com and register to pay in crypto whatever taxes their corporate hearts desire. It could be anything from cigarette sales taxes to employee withholding taxes, according to a report in The Wall Street Journal, which first noted the initiative.
  2. The Securities and Exchange Commission (SEC) said they are going to make their feelings known and precedent set by “Guidance by enforcement.” This means that the legal precedent for ICOs will be set through enforcement actions taken against ICOs. The aim of the SEC here is that teams know what expect and what can happen to an ICO that did not register as a security, if applicable.
  3. SEC official says agency developing cryptocurrency guidance. The Securities and Exchange Commission is developing guidance for cryptocurrencies that is likely to be published early next year, an agency official said recently.

Jonathan Ingram, Deputy Chief Counsel in the SEC’s Division of Corporation Finance; said the guidance is intended to help the industry determine if a particular digital asset is a security. If it is deemed a security, then the guidance would detail what a business should do to comply with securities regulations, he said. “We’re shooting for early next year for publication of that guidance,”

In a September letter to the SEC, House members said the “SEC could do more to clarify its position” on cryptocurrencies, adding that “formal guidance may be an appropriate approach to clearing up legal uncertainties.”

4. Federal Judge Rules SEC failed to establish ICO tokens are securities.
On November 27, 2018, Judge Gonzalo P. Curiel of the United States District Court for the Southern District of California dealt a temporary setback to the SEC in its efforts to secure a preliminary injunction against a planned initial coin offering (“ICO”) by Blockvest, LLC (“Blockvest”). In an 18-page order, the district court denied the SEC’s motion on grounds that the agency had failed to establish that the ICO tokens in question are subject to the federal securities laws. The SEC argued that an injunction (freeze of business accounts) was necessary due to Blockvest not adhering to anti-fraud provisions of the securities law. The SEC also said that Blockvest made multiple material misrepresentations like that they had received “regulatory approval” by their own created, self-regulating body.

Blockvest claimed their BLV token was a “utility commodity token.” Judge Curiel held that the SEC had failed to demonstrate that the BLVs were in fact securities subject to the federal securities laws. Judge Curiel removed the preliminary injunction and further elaborated on the three prongs of the Howey Test here.

5. Two U.S. based Initial Coin Offerings (ICO) were penalized and forced to refund investors. Paragon and AirToken, each raising $12 and $15 million USD respectively in their sales. Some details that stand out from the Securities and Exchange Commission (SEC) filing was that Paragon used celebrities like “The Game” to promote their offering and both were actively marketing on their website to United States non-accredited investors. Also, at least one class action was filed against Paragon in 2018.

As part of the settlements, the sanctioned companies have agreed to:

  • return funds to investors, they will be required to provide ownership proof of digital wallets and show financial institution records
  • All returns paid in USD
  • register the tokens as securities under the Securities Exchange Act of 1934
  • file periodic reports with the Securities and Exchange Commission (SEC) for at least one year
  • pay $250,000 in penalties

6. Celebrities Floyd Mayweather and DJ Khaled fined by the SEC for promoting ICOs without disclosures. Khaled Khaled, better known as music producer DJ Khaled, and professional boxer Floyd Mayweather Jr. both allegedly promoted investments in ICOs for Centra Tech Inc. in 2017 without disclosing the compensation they received in exchange for their endorsements ($50,000 for Khaled and $100,000 for Mayweather). This triggered a violation of the anti-touting provision of the federal securities laws.

It is important to note that Centra Tech founders were charged for allegedly making false claims about their product and about relationships they had with credible financial institutions, even creating a fictitious Centra Tech CEO. The Centra Tech founders also deceived investors into thinking the company had struck partnership deals with reputable corporations.

Part of the ICO marketing narrative included purported collaborations with Visa, Mastercard, Bancorp. They also claimed Centra Tech secured a money transmitter license in 38 states in the U.S.

7. AriseBank CEO faces 120 years in jail for fraudulent ICO among other charges. Jared Rice Sr. and Stanley Ford of the former crypto bank AriseBank have reached a settlement in a Texas federal court for scamming investors and must fork over over approximately $2.7 million to the SEC. Now the former ICO execs are “liable for $2,259,543 in disgorgement plus $68,423 in prejudgment interest, and each must pay a $184,767 penalty,” according to the SEC’s announcement. The settlement was reached without the admission or denial of guilt by the pair.

The AriseBank claimed to have raised $600 million and offered “FDIC-insured accounts and transactions.” They also failed to disclose that a key executive has an extensive criminal background.

In February, a SEC complaint states that Rice is on probation as a part of a plea bargain in Texas, an indictment in 2015 for theft and tampering with government records. He is also under felony indictment for an assault, followed by destroying the evidence of the crime by stealing the victim’s phone and deleting the recording of the incident.

8. The Securities and Exchange Commission (SEC) issued a cease-and-desist order against a crypto investment fund for distributing unregistered securities. The US securities regulator also slapped CoinAlpha Advisors LLC, a Delaware-based blockchain financial products company, with a $50,000 fine.

9. SEC Rallying International Cooperation To Crack Down On Dodgy ICOs. Steven Peikin, co-director of the enforcement division recently speaking at Harvard Law school, said they face the “daunting task of ferreting out misconduct and, where appropriate, recommending civil enforcement actions that variously seek injunctions or cease-and-desist orders, penalties, disgorgement of ill-gotten gains, suspensions and bars of bad actors, and the temporary suspension or delisting of securities.” Companies that went outside of the United States face a challenge to be brought to justice when there is fraud. The SEC is encouraging the help of overseas regulatory bodies to come together to enforce against fraud and protect investors.

Worldwide

  1. Security Token Offerings (STO) are still ICOs, in China… basically. This emerged after the People’s Bank of China (PBoC) deputy governor, Pan Gongsheng, warned those issuing STOs that they were violating the law. “The STO business that has surfaced recently is still essentially an illegal financial activity in China. Virtual money has become an accomplice to all kinds of illegal and criminal activities,” Gongsheng told an internet finance forum in Beijing, according to the South China Morning Post.
Huo Xuewen, Chief of financial watchdog Beijing Bureau of Financial Work, issued a stern warning to anyone trying to operate an STO in China “I want to warn those who are promoting STO fundraising in Beijing. Don’t do it in Beijing. You will be kicked out if you do it.”

2. South Korean National Assembly Holds Regulation Debate With Local Crypto Exchanges. Bithumb, CobitCoin, Coinone, Upbit and others were in attendance at the event. The discussion focused on Anti-Money Laundering (AML), customer protection and Know Your Customer (KYC) practices.

3. G20 agrees to Regulate Cryptocurrencies.

A declaration released by the forum read:

“We will regulate crypto-assets for anti-money laundering (AML) and countering the financing of terrorism in line with FATF standards and we will consider other responses as needed.”

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