Fear and HODLing at MIT: Blockchain Experts Weigh Impact of SEC Action
Regulation: It’s good for you, but it’s going to hurt.
That seemed to be the main takeaway for the cryptocurrency industry from Monday’s Business of Blockchain conference at the Massachusetts Institute of Technology (MIT).
On the one hand, the event was clouded by speculation that the U.S. Securities and Exchange Commission (SEC) may go as far as to classify two of the top three coins by market cap, ethereum and Ripple’s XRP, as securities. Such a determination could subject a wide swath of industry members to legal penalties – far beyond the promoters of recent initial coin offerings (ICOs) who were already on alert the last few months.
Those fears were reinforced late in the day when Gary Gensler, an old lion of financial services regulation, confirmed for the crowd that in his view, bitcoin’s two largest rivals may fit the description of securities in U.S. law.
“Ripple Labs sure seems like a common enterprise, or the Ethereum Foundation in 2014,” said Gensler, a former chairman of the Commodity Futures Trading Commission. “Ripple is doing a lot to advance the value of XRP.”
(The so-called Howey test says something is a security under U.S. law if it is an investment in a “common enterprise” offering an expectation of profits from the efforts of others.)
Yet, on the other hand, the general sentiment at the event was optimistic about regulators’ growing involvement in the space.
Neha Narula, director of the Digital Currency Initiative at MIT Media Lab, for example, told CoinDesk insufficient regulation can actually stifle innovation by deterring honest players because rampant scammers undermine market integrity.
And aligning with Gensler, Narula said, there need to be more honest conversations about the fact that many emerging cryptocurrencies are actually securities.
However, there may not be a bright line separating the two.
As Narula said:
“We’re realizing money versus equity isn’t a binary choice. It’s a spectrum.”
And that realization could have a serious impact on the cryptocurrency industry.
Patrick Murck, counsel at Cooley LLP and fellow at Harvard’s Berkman Klein Center for Internet & Society, told CoinDesk the token economy could be on the verge of a dramatic shift if the SEC agrees with Gensler.
If ether and XRP are deemed securities, cryptocurrency exchanges and general industry promoters or foundations, or anyone who sold or evangelized projects like ethereum to the general public, could be subject to legal penalties.
“It would be like shooting fish in a barrel,” Murck said, adding:
“There’s nothing magical about the blockchain that absolves you from investor protection regulations if investors have to trust you to deliver something.”
Driving that point home, Gensler in his talk cited several reasons that the way ethereum and XRP were issued and traded seemed to meet the definition of securities.
For example, the 2014 ethereum crowdsale would have created an expectation of profit for the people who purchased tokens before the network went live.
“The Ethereum Foundation offering had a 50 percent appreciation right in the first 42 days written into the offering,” Gensler said on stage. (The industry think tank Coin Center in Washington, D.C. promptly issued a statement that “ether is not a security,” rebutting Gensler’s argument.)
Meanwhile, for issuers of new tokens, it’s almost impossible to walk the line, even with more feedback from regulators and lawyers.
For example, so-called airdrops, once viewed as a way to avoid breaking securities laws by simply sending free tokens to people who already have some type of cryptocurrency wallet, are instead creating a damned-if-you-do, damned-if-you-don’t situation.
If issuers fail to collect information about recipients of airdrops, they may inadvertently violate international sanctions (what if that wallet belongs to someone in Iran?). On the other hand, if they do collect such information, the airdrop may start to look like an investment in regulators’ eyes, according to Murck.
“The SEC has interpreted the first prong of the Howey Test broadly,” Murck told CoinDesk. “The collection of information may be enough to fit the first prong” – pegging an airdrop as “an investment of money.”
Even so, Murck joined others at the conference in welcoming regulators’ participation in the space.
“They’re becoming a part of our blockchain community and that’s a valuable thing,” Murck said.
Part of the value is clearing up uncertainty.
The shortage of such clarity was illustrated during a talk by Kathleen Breitman, a co-founder of the Tezos project.
When asked whether securities regulations apply to her project’s tokens, Tezzies, she responded:
“I don’t know. I don’t mean to play coy, I’m not just an attorney…I would recommend token holders comply with relevant laws.”
But Gensler said legal clarity is slowly emerging in this red-hot market.
“If you do an issuance now, in April 2018, do it under U.S. securities laws,” said Gensler, who is now a senior lecturer at the MIT Sloan School of Management, “It’s better to bring it into a public policy framework, even if there’s a little bit of a chill.”
And perhaps some cooling off would be healthy. MIT’s Narula said she is deeply concerned about the lack of due diligence completed for many, if not most, cryptocurrency projects. Just because the code is open source doesn’t mean that knowledgeable people have evaluated it.
“A lot of investors don’t know that. They go by signaling,” Narula said. “A lot of projects have had some pretty fundamental flaws that were exposed only after a project launched.”
If nothing else, the excited chatter in the halls of MIT suggested that regulatory encroachment has yet to put a damper on the energy being channeled into blockchain tech.
Amber Baldet, the former JPMorgan Chase blockchain expert, said what makes her optimistic about the space, writ large, isn’t skyrocketing coin prices or even regulatory clarity on the horizon. It’s the explosive growth of this community in the wake of the 2017 boom.
“In order to have an internet of value, people are going to have to interact with each other,” Baldet said, speaking to the need for an ecosystem that includes everyone from enterprises like her former employer to accredited investors to retail investors.
“You meet thousands of people tackling these challenges in unique ways.”
Image via Pete Rizzo for CoinDesk.
Written by CoinDesk.com
$ 125 Million: Orchid Is Raising One of 2018’s Biggest Token Sales
Orchid Labs is raising $ 125 million in a SAFT sale, filings from the Securities and Exchange Commission (SEC) reveal.
According to a Form D published on April 20, Orchid has raised roughly $ 36.1 million out of a planned $ 125.59 million. Per the Form D filing, 42 investors have taken part in the sale of SAFTs – or Simple Agreements for Future Tokens – thus far. The SAFT gives accredited investors the right to claim blockchain tokens at a later date, and the investors involved must meet certain SEC-mandated income or asset thresholds in order to participate.
The startup is seeking to build an alternative to Tor, the anonymous browser software – Orchid’s white paper argues that Tor can be compromised due to a lack of network nodes. It also aims to provide an alternative to virtual private networks (VPN), which require users to trust the provider.
Orchid’s solution allows bandwidth users and providers to exchange ethereum-based Orchid tokens, which the firm hopes will incentivize greater participation than the Tor network has enjoyed. By executing these micropayments through the ethereum blockchain, Orchid has designed its network to be decentralized, in contrast to VPNs.
The firm raised $ 4.7 million in October from a raft of top-tier venture capital firms, including Andreessen Horowitz, Blockchain Capital, Polychain Capital and Sequoia.
Orchid’s co-founder and CEO Steven Waterhouse told CoinDesk at the time:
“This is about anti-surveillance and anti-censorship, the ability to not be tracked. We see this not just in China or the Middle East, but in this country, in states that are considered to be free. If you go back in history, there was a lot more concern about privacy on the internet before Facebook.”
Waterhouse told CoinDesk in October that his focus on private internet browsing began with the personal experience of being hacked.
“That really woke me up,” he said.
Orchid image via Shutterstock.
Written by CoinDesk.com
India Divided on Whether to Ban Crypto Use
No Consensus Among Regulators
India is preparing a Bill on the regulation of cryptocurrency. “The bill has been drafted and consultation has been started with the concerned agency,” the Navbharat Times reported last week. The news outlet quoted sources explaining that the regulators are divided on whether to ban the use of cryptocurrencies such as bitcoin.
“The finance ministry is in favor of regulating [cryptocurrency],” sources said. The Income Tax Department, on the contrary, is not in favor of regulation, the news outlet conveyed, and quoted sources explaining:
The regulation of virtual currency is almost impossible and it promotes the use of black money.
The RBI “is also not in favor of banning virtual currencies,” but sources pointed out that “the current form of the bill proposes to ban virtual currency businesses.” However, there may be exemptions for “issuing crypto tokens in exchange for assets.”
Meanwhile, the Indian Special Investigation Team (SIT) “wants to ban the use of bitcoins” after discovering at least four cases where the digital currency was used to pay for drugs, the Sunday Guardian reported. The SIT comprises of officials from the Narcotics Control Bureau (NCB), the Enforcement Directorate (ED), the Central Bureau of Investigation (CBI) and the Income Tax Department.
The SIT has previously asked the ED, NCB and the Income Tax Department “to take adequate measures to prevent the use of cryptocurrencies,” the publication noted, adding that the Team “has called for a second round of meetings to be held in Delhi next month, where the officials from all the aforementioned agencies will review the use of cryptocurrencies.”
Experts Say Crypto Ban Not Very Feasible
The debate is also taking place in the private sector. Sarvesh Tyagi, a Delhi-based cyber law expert, told the Sunday Guardian that “it is doubtful that the SIT will succeed in banning the use of cryptocurrencies. Ban is not a solution. We need a regulatory authority.” She elaborated:
A blanket ban on the use of cryptocurrencies is not a very feasible solution as drug smuggling is a big problem, and in most cases, these transactions have nothing to do with use of cryptocurrencies.
Crypto Businesses Fight Back
The RBI announced earlier this month for banks and payment gateways under its control to stop providing services to businesses dealing in cryptocurrencies. “Banks have already sent notices to exchanges,” Sathvik Vishwanath, CEO of a leading Indian exchange Unocoin, told news.Bitcoin.com.
The RBI allows banks “about 3 months of time to end the relationships” with crypto businesses, he noted, adding that crypto companies “will be attempting to challenge the [RBI] order” in the Supreme Court as a consortium.
One company, Kali Digital Eco-Systems, has already appealed to the High Court in Delhi against the recent RBI crackdown. The company is behind the upcoming crypto exchange called Coinrecoil.
On Sunday, the company announced that Delhi High Court has accepted its petition against the Indian regulators, adding that:
Hon’ble High Court of Delhi has issued a notice to the Reserve Bank of India, the Union of India through Secretary, Ministry of Finance and GST Council. The next hearing in this case is on May 24, 2018.
Written by CCN.com
California Takes ‘First Step’ Toward Embracing Blockchain With New Bill
A California Senator’s blockchain bill is advancing in the State Legislature.
Senator Bob Hertzberg, a Democrat representing the San Fernando Valley, has introduced a bill that would allow blockchain technology into formal documentation known as a corporation’s articles of incorporation throughout the state of California. Senator Hertzberg presented the bill, dubbed SB 838, to the Senate Banking and Financial Institutions Committee in recent days, which he says is a “first step” to unveil the decentralized technology to the state.
“The world around us is changing, and government must adapt with these rapidly evolving times. California needs to continue our legacy of taking on new and developing technologies, especially ones like blockchain, which is being embraced worldwide and presents a strong level of security that is resistant to hacking,” said Senator Hertzberg in a press release.
SB 838 is designed to introduce cryptography-fueled security into the issuance and transfer of corporate share certificates, which would be “recorded and kept on or by means of blockchain technology or one or more distributed electronic networks, as specified,” according to the bill text.
In addition to issuance and transfers, the bill extends to “the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each of those stockholders.”
Senator Hertzberg not only introduced the bill but he is also educating his peers about the public ledger, pointing out that 11 of Forbes’ Fintech 50 for 2018 rely on the blockchain or are somehow engaged with cryptocurrencies. He explained that there are “multitude” of other use cases for the blockchain beyond volatile cryptocurrencies and suggested applications such as voting and land titles. Incidentally, SB 838 covers a public or private ledger that may be “driven by tokenized crypto economics or tokenless.”
Perhaps the bill could pave the way for businesses to access blockchains like JPMorgan’s Quorum project, which is said to be on the block for wider access. Senator Hertzberg offers more local examples, such as UCLA and Berkeley having developed blockchain labs to promote innovation within the blockchain and cryptocurrency communities.
Winning Over the West
While Senator Hertzberg’s bill is unique and targets specific functions within financial services, California would be joining other Western states that are also adopting blockchain technology. Arizona’s blockchain bill recently became law, validating data stored and shared among corporations on the blockchain. Meanwhile, Colorado and Wyoming have also made strides.
Next up, SB 838 will be presented to the Senate Judiciary Committee in May.
Written by CCN.com
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