2019 The Year of Compliance
Is 2019 going to be a bear year or a bull year for cryptocurrencies? I’ll leave the prognostication up to the crystal ball gazers. But what I can say with certainty is that 2019 is going to be a year of more aggressive regulatory development governing crypto and increased scrutiny of crypto-related businesses. And, somewhat related to this, there will, of course, be increased vigor on the part of scammers and hackers.
While I generally endeavor to avoid conflating cryptocurrency with its underlying technology, the blockchain, they are connected at the hip and at least part of the burden of ensuring a sustainable and healthy future for cryptocurrencies is going to fall on blockchain developers. (I believe that an even greater burden falls on exchanges, but that’s a topic for another day.) And while blockchain developers pride themselves on staying a step ahead in technological development, it’s now going to be equally important for them to stay a step ahead of regulatory development.
The “healthier” — that is, more focused on compliance — an ecosystem, the better it is for everyone: the consumer; the investor; the solution providers; and government regulators.
The challenges are compounded by the fact that the regulatory environment is anything but uniform globally and it is in a constant state of flux. There isn’t even a generally accepted definition of what cryptocurrency is: a virtual asset? A currency? A security? A utility token? My sense in speaking with government regulators from various jurisdictions is that they are sincerely trying to balance the interests of consumers, with the desire to encourage technological innovation. The blockchain promises (and is delivering) on a number of fronts that governments, in general, recognize are beneficial. These include financial inclusion, additional financing channels for entrepreneurs, optimizing land registries, use of smart contracts to address corruption and improving healthcare delivery. The list goes on.
At the same time, scams abound, with some research claiming over 90% of ICOs are fraudulent, the hacking of exchanges and wallets is pernicious and pervasive.
So, with the regulatory environment being a moving target, what’s a start-up company committed to compliance to do? Let me share with you some recent thinking we’ve done at Pundi X.
Do we want our tokens to be classified as a security? Every company has to consider whether it’s worth the administrative burden and costs of complying with various regulatory frameworks governing securities.
For us, we’ve determined that the answer at this point in time is “no”. But some jurisdictions, for example, Malaysia, don’t seem to be moving in the direction of giving us a choice. Lim Guan Eng, the Malaysian Minister of Finance, recently confirmed the government’s intention to treat all digital currencies and tokens as securities under the regulation of the Securities Commission of Malaysia.
The US Securities and Exchange Commission, which many other governments look to for guidance, has made the situation even more complicated. When is a token a security? The SEC Director, William Hinman, has indicated that “the term ‘security’ is not static and does not strictly inhere to the instrument,” meaning what is a utility token today might become a security tomorrow — and the other way around. The Chairman of the SEC, Jay Clayton said, “I believe every ICO I’ve seen is a security.”
And everyone everywhere listens to the SEC because its reach can go beyond the US borders. For example, Kik, a Canadian messaging app company, is planning to take on the SEC which is considering an action against Kik for its 2017 ICO, contending it was an unregistered securities offering. There are a dozen such cases pending before the SEC. So, is it any wonder that non-US ICOs prohibit the participation of US citizens or residents? Companies also need to consider the possible regulatory consequences of permitting US citizens to participate in other crypto-related activity, like swaps or staking.
The same restrictions are also often imposed on citizens and residents of Malaysia and the People’s Republic of China, also due to their stance on cryptocurrencies. Likewise, many non-US exchanges also shy away from citizens of crypto-restrictive countries for fear that the regulatory agencies will attempt to take action against them.
Staying ahead of the regulatory curve and complete our obligations to the holders
So, what’s a crypto-related company to do? We’ve thought long and hard about this at Pundi X. Given that the SEC has no compunction about looking back in time, we are making every effort to remove any attributes of a security from our NPXS tokens. While we do not believe that our unlocked token program constituted a “return on investment” — an attribute associated with securities — we have determined that it would be prudent for us to accelerate our unlocked token program and thus complete our obligations to holders of the NPXS tokens under the Sales Agreement ahead of schedule. (Details of the accelerated unlocked token will be released in a separate announcement.) A number of exchanges have also voiced their concerns about airdrops and many are considering stopping airdrop support.
Also, to stay ahead of the regulatory curve, Pundi X will be implementing a more robust KYC process for our XWallet, XPASS, and XPOS.
Pundi X started and remains a community-centric project and we believe that an enhanced KYC process is a prudent step to help better protect our community.
Because of the rapidly changing regulatory environment, it is essential for crypto-related companies to maintain an open channel of communications with government agencies and influencers. This is a win-win approach: it allows the government to understand first-hand what the industry needs to flourish and at the same time, it enables companies to stay abreast of regulatory developments and avoid missteps and misunderstandings.
Emphasizing security and decentralization
In terms of improving security, we at Pundi X work to leverage the strength of traditional app technology. So, for example, instituting 2FA and making our code more robust is in line with our objectives to improve security.
We have also received suggestions to house holders’ NPXS / NPXSXEM in a more decentralized manner. What this means in practice is enabling holders to use their own ERC20 and NEM wallets, for which they hold their private key, while performing our upcoming, optional stake for f(x) Coin.
This will be a new option in addition to transferring NPXS / NPXSXEM into XWallet. We are listening to the community and our tech team is working hard to enable the private wallet option before March 10, the day of this optional staking process kicking off. We will do this by having holders “register” their own ERC20 or NEM wallet public address, in XWallet so that we can properly track the holdings of NPXS / NPXSXEM in those wallets to enable decentralized staking.
- Ongoing and open communications with regulators and monetary authorities in jurisdictions where we operate. In jurisdictions that are supportive, we will accelerate deployment; in jurisdictions that consider our operations to be non-compliant, we will exit that market.
- Token unlock will be accelerated. Announcement and details will be released on February 11, 2019. We plan to start the accelerated token unlock program in March 2019 and the distribution will be made in April 2019. The remaining token unlock will be completed before the end of Q3 2019.
- More compliant processes: KYC processes across our products will be strengthened, for example, by requiring more verifiable information before approval.
- More secure products: For example, by enabling 2FA for the XWallet and plan to implementing “decentralized staking.”
2019 is certain to be a year of significant developments in the blockchain space. We at Pundi X are incredibly excited about the potential of the Function X blockchain.
At the same time, our commitment to compliance has never been stronger and we are following and, hopefully through our conduct, influencing the regulatory development in a positive way.
David Ben Kay
Chief Legal Officer