EOS Maker Block.One Settles With SEC Over Unregistered Securities Sale, Cryptocurrency Exchanges Including Coinbase Disclose Ratings of Digital Assets, and Harbor’s Regulatory Wait Ends as FINRA Awards Broker-Dealer License
Weekly Investor Letter
Oct 3- Crypto assets increased around 1% this week, bringing the total market cap up to $221 billion. The Crescent Crypto Market Index (CCMIX) was down 0.3% while BTC lost 1.4% over the same period.
The crypto market saw a very marginal gain after a strong drawdown last week. The total value of the crypto market has dropped a little over 16% over the last 31 days, with Bitcoin dropping 19%. Large-cap altcoins, as a whole, performed similarly to Bitcoin this week. Bitcoin outperformed only the Crescent Crypto Anonymity Index and 3 CCMIX constituents this week.
Bitcoin vs. CCMIX vs. CCALT vs. CCDARK vs. CCSMART
Sep 26th — Oct 3rd, 2019
Market Index Constituent Performance
Sep 27th — Oct 3rd, 2019
- BTC performed in the middle of the pack of other large-cap constituents but still found itself down 1.3% on the week. BTC was the top performer last week down almost 16%. This is the fourth consecutive week that Bitcoin ended in the red.
- The CCMIX saw an underwhelming performance in its constituents, with five out of nine ending the week in the red. After the sizeable decrease last week which saw all assets down more than 15%, the constituents this week saw a more expected return with no asset migrating past 5% price change.
- XLM lost around 28% last week and did not rebound. It ended the week in the green up a marginal 0.3%.
- The CCSMART index outperformed all other indices this week up 4.15%. CCALT followed with a 2.15% gain. CCSMART’s increase was driven primarily by ETH’s leading performance this week up 5%, and EOS up 3.35%.
- ETH and XRP performed in the top 3 this week up for the third consecutive week, up 5% and 1.6% respectively.
- BSV ended last week down 30.3% — the most of any constituent. BSV ended the week as the second-worst performing constituent down 2.2%. This marks the third week in a row with a bottom two performance. Bitcoin and Bitcoin forks as a whole underperformed, with BCH losing 1.2% and BTC losing 1.3%.
- XMR was the worst performing asset this week down 4.3%.
- BTC dominance increased slightly from 68.4% of the total crypto market cap to 67.6% this week.
Coinbase and other high profile digital asset companies released a digital asset rating system that ranks assets on its security-like characteristics. This Crypto Ratings Council includes the following companies: Anchorage, Bittrex, Circle, Cumberland, Genesis, Grayscale, Kraken, and Coinbase. The council outlines their security framework as follows: “a points-based rating system built upon a set of factual questions that assess each element of the legal test to determine whether an asset is a security. Our framework is derived directly from case law and SEC guidance…The analytical framework results in a score between 1 and 5 for each asset we review. A score of 1 means the Council’s analysis suggests the asset has few or no characteristics consistent with treatment as a security under the U.S. federal securities laws. A score of 5 means the Council’s analysis suggests that an asset has many characteristics strongly consistent with treatment as a security.”
Why Does This Matter?
The CRC rated 20 digital assets, and this has potentially large implications for these respective projects. Here is the current list: Algorand 2.0, Augur 3.75, Bitcoin 1.0, Chainlink 2.0, Dai 1.0, Decentraland 3.75, EOS 3.75, Ethereum 2.0, FOAM 3.75, Hadera Hasgraph 3.75, Litecoin 1.0, Loom Network 3.75, Maker 4.50, Monero 1.0 Numeraire 2.0, Polymath 4.5, Stellar 3.75, Tezos 3.75, XRP 4.0, Zcash 2.0. The CRC has seen a mixed response within the crypto ecosystem. Many see the formation of this council as nonsensical and the ratings arbitrary with a clear lack of sufficient understanding of securities law. With that said, many others see the CRC as a progressive step towards institutionalization in the face of a slow-moving SEC regulatory body. The CRC takes on accountability, as well as help the SEC frame their understanding.
The SEC settled charges against EOS issuer Block.one for conducting an unregistered security offering in 2017 and 2018; the firm agreed to pay $24M to settle all matters with the SEC. The payment represents 0.6% of the total funds raised in the $4.1B Initial Coin offering (ICO). Block.one said the settlement relates specifically to the ERC-20 tokens sold during the ICO, which haven’t been in circulation since EOS transitioned to its own chain (EOS mainnet) in June 2018. Jake Chervinsky, a crypto informed lawyer who has amassed a strong Twitter following, suggests that the SEC most likely believes EOS are not securities. He stated, “Both actions focused on whether the tokens were securities at the time of sale, *not* whether they’re securities today…The fact that neither action addressed EOS or Siacoins in their present condition is critically important.”
Why Does This Matter?
Many believe this sets a bad precedent for other companies thinking of issuing a token. For example, Blockstack, who conducted an ICO in a regulatory compliant manner, would be in a much better position if they did the same as Block.one. Blockstack recently completed the first SEC-approved token offering, raising $23M between its Reg A+ offering for the general public as well as its Reg S offering for institutional investors in Asia, but spent 10 months and ~$2M getting SEC approval — that’s 8.7% of the total raise compared to 0.6% that Block.one had to pay to the SEC. Additionally, EOS has more liquidity than Blockstack since it can trade on unregulated crypto exchanges and Blockstack must trade on U.S. regulated securities exchanges with virtually no liquidity. This loss is even greater when considering the implication of this ruling potentially classifying EOS as a non-security.
Harbor Square Investment, a subsidiary of the tokenized securities platform Harbor, received a broker-dealer license from FINRA last Friday. This breakthrough came after a long stand-off between FINRA and the SEC and hopeful crypto broker-dealers. Coindesk notes that these regulators “slow-walked” around 40 firms’ applications. Broker-dealers can buy and sell crypto assets for their clients but under heavy restrictions. regulators have stated private key access, record-keeping, and asset custodianship as a few of the complicated issues leading to the slow walk. Harbor CEO Josh Stein stated, “It took the regulators a long time to get a handle on the space and understand it and its implications. It took the regulators a long time to get a handle on the space and understand it and its implications.” Harbor outlined that their approach to receiving this license mirrored that of Wall Street instead of tech startups. Stein added, “ We concentrated on institutional-grade people, institutional-grade processes, and institutional-grade tech from the beginning.”
Why Does This Matter?
With its broker-dealer license, Harbor aims to offer a full-stack service as a digital asset issuer. “We’re going to provide the technology platform to manage the fundraising, the technology to manage investors, the technology to tokenize and enable liquidity,” Stein said. Harbor’s recent licensing may pave the way for other crypto broker-dealers. This news indicates a growing maturity of the digital asset industry, with regulators now clearly able to work and collaborate with crypto broker-dealers. This has the potential for significant institutional money inflows, as the necessary piping of the digital asset ecosystem continues to be built out.