Blockchain and Crypto Policies Worldwide

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October 30, 2017

Rapid Rise of Cryptocurrencies and Blockchain Technology

Over the past few years, inventions in the fintech space have been rapidly transforming into innovations thanks to early commercialization, mass acceptance and adoption.

Cryptocurrencies have been around for a long time, but they have gained maximum traction and attention in the past decade. After the launch and success of Bitcoin, other cryptocurrencies soon followed, trying to break in the Fintech industry.

The rise and success of cryptocurrencies has been such that today, there are more than 1,100 cryptocurrencies currently trading in the financial market.

The price of cryptocurrencies ranges between approximately a quarter to thousands of dollars. Although recently, Bitcoin broke an all-time record high and hit a historic mark when its value peaked at a whopping $5,856.10 on October 13, 2017. The $5,000 mark has long been a threshold of high-anticipation in the bitcoin community.

The currency, which is up more than 400% this year, is turning heads of businesses, financial institutions and governments all around the world. But it’s also raising regulatory concerns and questions.

In this article, BI Intelligence, Business Insider’s premium research service, explores the regulations surrounding cryptocurrencies worldwide and their subsequent impact and spread.

BII

Cryptocurrency Regulations Around the World

Amongst world economies and governments, cryptocurrency has been a topic of continual debate. Many governments feel that allowing cryptocurrency for legal transactions and use would ultimately result in loss of economic power and a shift towards decentralized economies globally.

Even though many countries across the world permit cryptocurrencies, they have been under scrutiny and seen with skeptical eyes in many others. Certain countries have gone to the extent of banning the currency, making its use, possession, and trade illegal.

BI Intelligence has gone into further depth in identifying and listing the blockchain regulations and associated issues in the U.S., Europe, and the rest of the world.

Blockchain Regulations in the U.S.

According to The Columbia Science and Technology Law Review, the regulatory responses to emerging technologies, and to blockchain in particular, range from excitement to suspicion to indifference.

The law review states that the U.S. federal government has not exercised its constitutional preemptive power to regulate blockchain to the exclusion of states (as it generally does with financial regulation) or even expressed intention to do so, regardless of the interest of federal agencies. And so the states remain free to introduce their own rules and regulations. As an example, although New York did not enact state-wide legislation recognizing blockchain for record-keeping purposes, in June 2015 it became the first state in the U.S. to regulate virtual currency companies through state agency rulemaking.

In 2017, at least eight U.S. States have worked on bills accepting or promoting the use of Bitcoin and blockchain technology, while a couple of them have already passed them into law.

The most important developments for blockchain’s regulation and implementation in the U.S. in an evidentiary context occurred in Arizona (recognition of smart contracts), Vermont (blockchain as evidence), Chicago (real estate records), and, most importantly, Delaware (pending initiative authorizing registration of shares of Delaware companies in blockchain form).

In the U.S., Bitcoin is set to be given the same financial safeguards as traditional assets. The U.S. Commodity Futures Trading Commission has granted LedgerX, a cryptocurrency trading platform operator, approval to become the first federally regulated digital currency options exchange and clearinghouse in the U.S.

Blockchain Regulation BII

Blockchain Regulations in Europe

The overall approach of the EU towards the blockchain technology is positive and welcoming. The EU appears to be following the path of an innovation-first business philosophy, which could end up supporting development of virtual currencies from two angles: 1) encouraging the exploration of use cases to test impact and laws, and 2) giving entrepreneurs confidence that their “approved” applications will be more trusted by their target markets.

This approach, combined with the EU’s scope as regulators for a 28-country economic bloc, could not only encourage an ecosystem of thinkers and doers, but could also end up making Europe a prime destination for blockchain development, as businesses choose the continent for their domicile and as talent flocks to the area.

Earlier this year, the executive arm of the European Union government revealed that it is working on the blockchain to support distributed ledger-based projects. According to this official press release published on February 7th, the Commission is considering growing its efforts on supporting more projects related to the distributed ledger technology (DLT).

The European Commission is “actively monitoring Blockchain and DLT developments” and is working on exploring “DLT benefits and challenges as well as fields for application in financial services”.

The official press release also clarified that the Commission wants to “pilot projects to foster decentralized innovation ecosystems and help reshape interactions between consumers, producers, creators and among citizens, businesses and administrations to the end benefit of society.”

Switzerland has become one of the main European hubs for cryptocurrency and blockchain development. This has been spearheaded by the Crypto Valley Association, a Swiss non-profit blockchain and cryptographic technology ecosystem, which has started to develop an ICO Code of Conduct in light of China’s recent ban of token crowdsales.

BII

Regulating Blockchain Technology Worldwide

Blockchain is the technology of choice for many startups. As per research by Outlier Ventures Research Team in May to June of 2016, 200 new startups were added in six weeks. Businesses and startups popped up around the virtual technology and sprouted with lightning speed. While many countries are supporting the development of the digital currencies, thus encouraging new ways of transacting and new businesses to bud, there are some that have boycotted the new technology, deeming it as an illegal negative disruption that brings financial instability and global economic unrest.

According to the Congressional resolution proposed July 14, 2016in the U.S., “blockchain technology with the appropriate protections has the potential to fundamentally change the manner in which trust and security are established in online transactions through various potential applications in sectors including financial services, payments, health care, energy, property management, and intellectual property management.”

The hundreds of pilots and proofs-of-concept currently in motion are but a tip of the iceberg when it comes to potential applications of the blockchain technology.

The world is slowly and steadily learning and experiencing the advantages this new age of technology has to offer, which is why the story is constantly developing and changing.

Catalonia Considers Separate Digital Currency and E-Residency Program

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October 29, 2017

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People wave separatist Catalan flags and placards during a demonstration organised by Catalan pro-independence movements ANC (Catalan National Assembly) and Omnium Cutural, following the imprisonment of their two leaders in Barcelona — People wave separatist Catalan flags and placards during a demonstration organised by Catalan pro-independence movements ANC (Catalan National Assembly) and Omnium Cutural, following the imprisonment of their two leaders Jordi Sanchez and Jordi Cuixart, in Barcelona, Spain, October 21, 2017. REUTERS/Ivan Alvarado - RC18CE4F1F60

Catalonia, which is fighting for independence from Spain, is considering an e-residency program similar to the one in Estonia. Catalonia is also considering adopting its own digital token or cryptocurrency.

The Government of Catalonia, the Generalitat de Catalunya, has sent representatives to Estonia to learn about the e-residency program, which offers a government-issued digital identity card that provides a way to operate a location-independent business online.

Dani Marco, the director of SmartCatalonia, an official Catalan agency, said the Estonians built a model of economic development from scratch. Marco appears to be heading Catalonia’s e-residency initiative.

Catalonia continues to move forward with plans to create an economy separate from Spain, according to El Pais, Spain’s leading newspaper. Estonia’s e-residency program serves as Catalonia’s model and could emulate an Estonian proposal to issue national blockchain based tokens.

E-Residency Benefits

El Pais reported that Catalonia is interested in Estonia’s e-residency program since the program has no borders. The e-residency program has attracted more than 20,000 entrepreneurs from 143 countries since 2014, including 336 from Spain.

El Pais further reported that Catalonia has the largest number of entrepreneurs and those working with virtual currencies in Spain.

Vitalik Buterin Weighs In

Blockchain experts in Catalonia have sought help from Vitalik Buterin, Ethereum’s founder, according to El Pais. Vitalik advised the Catalonians to create an ICO to offer a currency that would work in tandem with the financing of a business project for the virtual residence program. The e-residency ecosystem could create an economic community independent of a central bank.

Estonia recently proposed “Estcoin,” a national cryptocurrency. If the country follows through on this plan, it would be the first national government to launch an ICO.

Kaspar Korjus, managing director for Estonia’s e-residency program, posted a Medium blog in August claiming Estonia could offer Estcoins to residents. The coins could be managed by the Republic of Estonia, but accessed by anyone through the e-residency program. The program would launch an ICO to offer the coins.

Korjus also said the ability to start a location independent company is the main factor driving the growth of the e-residency program.

Estonia’s ICO In Doubt

CCN reported last month, however, that Estonia will not launch an ICO or become the first nation to adopt a state-backed cryptocurrency. An advisor to Sweden’s central bank told Business Insider that his office had confirmed with the Estonian central bank that they have no plans to launch an official digital currency

Since Korjus posted the proposal on the e-residency program website, an official government domain address that includes the official seal of the Republic of Estonia, many were led to believe the proposal has government approval.

Meanwhile, Mario Draghi, chief of the European Central Bank, criticized the Estonian proposal for a separate cryptocurrency, according to the International Business Times. Draghi said no member state can introduce its own currency since the Euro is the Eurozone’s currency

Korjus, however, told a recent GovChain blockchain event in London that Estcoins could serve as an EU-wide cryptocurrency or crypto token.

If startups can raise funds, why not governments, Korjus asked. There are currently 1.3 million e-residents in Estonia’s e-voting system.

Law Firms Are Opening Bitcoin Wallets to Prepare for Data Breaches

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October 29, 2017

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Rather than waiting until it’s too late, law firms are opening up bitcoin wallets to pay ransoms in case their data is stolen, according to a cybersecurity expert.

John Sweeney, president of IT and cybersecurity advisors LogicForce, said that law firms are taking proactive steps rather than reactive steps. However, while he doesn’t necessarily agree with paying ransoms, he said that it ‘makes sense’ to be prepared, reports Business Insider.

This year has seen several data breaches where hackers have demanded ransoms to be paid in bitcoin. At the beginning of the year, an Austrian hotel was ordered to pay a bitcoin ransom to regain access to its rooms; in May, Disney’s Pirates film was held for ransom by hackers; and in June a South Korean firm paid a $1 million bitcoin ransom in order to retrieve its data.

Unsurprisingly, the Financial Supervisory Service of South Korea has told local banks not to cave into threats by DDoS attackers, following the million-dollar ransom paid by the South Korean firm.

Yet, while countless individuals have paid ransom demands to hackers to regain access to their files that’s not always the case. One example is the NotPetya hack, which occurred this summer. Even though victims paid the ransom, it was reported that they were unlikely to have received the decryption keys to access their files.

Sweeney believes, though, that firms must do more to protect themselves. According to him, the chances of the hacker being caught is slim and the probability of them being prosecuted is even smaller.

He said:

We are predicting there are going to be more sophisticated attempts to intrude at firms that work with highly visible clients whose IP or business information is extremely valuable.

LogicForce is reportedly going to be opening up its own bitcoin account in the next few weeks in order to assist with client ‘disaster recovery.’

Interview: Bitcoin Exchange Binance on China’s ICO Ban, Burning $1.5 Million in Tokens & More

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October 29, 2017

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Cryptocurrency exchange Binance, which launched with 0% trading fees in an attempt to heat up competition among exchanges, recently announces its Q1 results and revealed that, as planned in its whitepaper, it burned 986,000 Binance Coins (BNB), worth about $1.5 million. These, the exchange revealed, equaled 20% of its profits.

The exchange’s whitepaper details that it will buy back 50% of its total token supply, which equals 100 million BNB tokens, further improving their value. On a LindkedIn post, the company’s CEO Changpeng Zhao further detailed that this means the company made $7.5 million worth of profit in its first few months, and compared it to the $15 million it raised during its ICO.

In the post, Zhao added that it wasn’t easy for Binance to make it in its first few months, as it immediately had to deal with one of biggest turns in cryptocurrency history: China’s crackdown. CCN covered that the company had to delist tokens, issue refunds on ICOs, and block Chinese access.

He further revealed that the community’s support was vital for the exchange’s survival, and that the rest of its Q1 profits will be invested back into growth so it can generate even more revenue next quarter. New features and new currencies were teased, but Zhao didn’t reveal a lot of details.

Interested in Binance’s relationship with the cryptocurrency community, and in its approach to China’s crackdown, CCN caught up with Changpeng Zhao to discuss how the exchange got where it is, his take on the current cryptocurrency scene, and more. Here’s the interview:

CCN: How did you first get into bitcoin? What did you see in the cryptocurrency?

CZ: I first got into bitcoin through a recommendation from Ron Cao, who was the Managing Director at Light Speed Ventures in China. That was early 2013. I also have known Bobby Lee for a few years then. Bobby just joined BTCChina at that time. I looked into bitcoin, and quit my 8 year-old startup shortly after that. It was clear then as it is even clearer now, crypto is the future.

Cryptocurrency have some clear advantages, and a few less shortcomings compared to fiat currencies. Having lived and worked in multiple places in the world including, Vancouver, Montreal, Tokyo, New York, Shanghai, and HK, I liked the borderlessness of crypto. Cryptocurrency is the true international currency.

CCN: Why did you decide to launch Binance?

CZ: This is an old idea actually. I had this idea back in 2013. I see two types of exchanges back then. There should be a handful of exchanges in each country, handling fiat to crypto exchange. There would be also be a handful of crypto-to-crypto exchanges around the world, handling pure crypto conversion. After I joined Blockchain.info, we discussed it at length. This vision has not changed much through the years.

After I joined Blockchain.info in 2013, we discussed this at length. But it was too early. There just wasn’t enough altcoins worth trading back then. The mission was to more people from fiat to crypto. After leaving OKCoin in 2015, we considered the idea again, but decided it was still too early. But now, the time is right.

CCN: How did China’s crackdown affect the exchange?

CZ: It affected different exchanges in different ways. Many Chinese exchanges were shutdown. Luckily, we were always registered outside of China, and we had our servers outside of China when the news came out. So we were not affected as much. In fact, we benefited a little bit due to less “competition” in the end.

CCN: What went through your mind when news about it came out?

CZ: There were rumors long before the official news came out. We had a feeling the news wasn’t going to be good, so we prepared ahead of time. And acted quickly. That turned out to be instrumental in handling the situation. Even then, when the news came out, and the enforcement of it followed through, I was surprised. I learned again it is better to be prepared than sorry.

CCN: Given the recent crackdown, how are ICOs and regulations going to mesh in the future?

CZ: I can’t predict future regulation changes. That’s a tough one. But one can logically expect people will adapt. They go where regulations are favorable. We already see many strong projects, talented people, and vast funds moving away from countries that’s unfavorable to countries that are. So countries with smart regulations will attract these and grow.

CCN: Do you believe China will resume cryptocurrency trading by licensing exchanges?

CZ: Again, I have no idea on this one. It’s hard to predict what the government(s) will do. Even a single government are made up of many different divisions and people. They each have their own view and agendas. It’s just hard to predict.

CCN: Where do you see Binance in the next five years?

CZ: To the moon, haha. I believe Binance is well positioned for explosive growth now. We got lucky that we grew quickly from the start, we got to a point where we could withstand the changes when that happened. In a sense, the changes wiped the slate clean, now we are off to the races. I generally don’t like it when startup team start out wanting to build eco-systems. So, we didn’t state much of those in our whitepaper, but we are in a strong position to do that. And we will do it quickly. We will be launching Binance Labs, an incubator for blockchain technology startups. I haven’t told anyone else before, you are the first. But feel free to publicize it. It will come very soon. We plan to build a strong eco-system in the next five year.

CCN: On a LinkedIn post you stated new features will be coming out. Can you give us a scoop?

CZ: Haha, that was a good teaser. They will come out soon enough, and everyone will know.

CCN: Is the cryptocurrency market in a bubble?

CZ: No, absolutely not. We have just seen how tough bitcoin’s price can with stand pressure. If you imagine any company stock on a fiat exchange, facing this type of pressure from the government, their price would have gone to 0 long long ago. The fact that bitcoin price stood high is a testament that it is not a bubble. In fact, it is extremely solid.

Now, are some of the ICO projects over hyped? Very possible. But this is project dependent, I think, not the overall market. You still need to select individual projects carefully.

CCN: What’s Binance’s take on the upcoming Bitcoin Gold and SegWit2x hard forks?

CZ: We always have to support forks from a withdraw perspective. We will always ensure our traders have the forked coins, as they will probably have some value, no matter how small. We never rob our traders their deserved value.

As an exchange, we don’t control forking. The miners do. We have influence on what’s traded (ie, liquidity). We will decide what the trade using our standard review process. If the fork get enough interest, we will turn on the trading pair.

For us, we don’t have a philosophical view on which fork is better. Small blocks or big blocks, it doesn’t matter too much. If it was up to us, we simple want a fork that is not congested, low transaction fees and have many users.

CCN: Any info on when Binance’s decentralized exchange will be launched?

CZ: This is a mid term project. There are many implementations of decentralized exchanges out there. But we feel the technology has not got to a point for explosive growth yet. We are keeping a keen eye in this area though, and we strongly support other decentralized exchange initiatives. We listed 4 so far: AirSwap, Kyber, OpenANX and Loopring on our exchange. Binance have our own team working on some prototypes already, but there are still missing pieces technology wise, so it won’t be too soon. We want ours to come out with a bang, much like what we did with our centralized exchange.

CCN: Is there anything else you would like to share with our readers?

CZ: Many people still have the misconception that Binance is a Chinese exchange. We are not. In fact, that’s the only market we don’t service at the moment. Binance has just got a few new offices in a few different locations. We are here to build a true international crypto exchange. I am bullish.

Japanese Conglomerate SBI Group Launches Eight Cryptocurrency-Based Businesses

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October 29, 2017

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Japan-based financial services firm SBI Group has announced its plans to establish several new businesses based on digital currency. The group is simultaneously developing eight businesses including hedge fund management, mining, and a derivatives market.

Group president and chief executive officer (CEO) Yoshitaka Kitao explained their plans at the company’s earnings results briefing session in late October 2017. He detailed how the firm is “pursuing synergies between [its] current financial ecosystem and [its] new financial ecosystem based on cryptocurrency.”

Brief details of the company’s plans

Based on the group’s presentation, it plans to create “a dominant cryptocurrency exchange platform, amid other platforms, based on the ‘customer-centric principle.’ The company also intends to establish a virtual currency exchange platform in Hong Kong.

Part of the presentation reads:

“Currently waiting for the appropriate timing to start the [exchange] service, where the key decision factors are the progress of SBI Crypto’s mining, along with the division situation of [the upcoming] hard fork.”

In mining, SBI Group plans to “acquire digital currency share through mining, in a bid to stabilize the market.” The company also intends to contribute to “market stabilization by providing new trading opportunities in cryptocurrency for institutional investors” through the creation of a crypto derivatives market and management of crypto hedge funds.

The presentation reads:

“In order to stabilize the volatility in virtual currencies, the participation of institutional investors who make long-term investments are expected.”

Moreover, the company also plans to manage a virtual currency portal site that will disseminate crypto-related and initial coin offering (ICO) rating information. In early October, it was reported that Morningstar Japan is launching the first ICO rating business in the country. The majority shareholder of Morningstar Japan is SBI Group, which owns 49.54 percent of the firm’s shares.

Vietnamese Central Bank Bans Cryptocurrencies

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October 29, 2017

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Vietnam’s central bank, State Bank of Vietnam has declared the use of digital currencies in the country as illegal. The central bank also announced that it will impose a fine on anyone caught utilizing the cryptocurrencies starting early 2018.

Based on the new monetary law issued by the bank that is scheduled to go into effect during the first quarter of 2018, Bitcoin and other virtual cryptocurrencies are already considered as illegal and their use will be prohibited in the country. The law also states that the only authorized payment methods in the country are those issued or controlled by the State Bank of Vietnam.

Performance of Bitcoin and other digital currencies in the market and possible effects of the ban

The ban imposed by the State Bank of Vietnam comes at a time where Bitcoin, the leading cryptocurrency, is setting record highs in trading markets. This is expected to affect the impact of the new law on the use of virtual currencies in the country. It is certain however, that the ban on virtual currencies will have little or no effect on individuals who want to use them in their transactions. The only thing the government can do is to launch a campaign against centralized companies using digital currencies.

The decision by the central bank to declare cryptocurrencies as illegal is viewed as very unfortunate, as it stifles innovations in the financial sector. However, the law can be considered as a way by the government to emulate the actions of other countries around the world. It’s expected that this ban can be lifted in the future if the fears or apprehensions of possible scams involving the use of the digital currencies will be proven otherwise.

Speculators Jump On New Gold Rush Called Ethereum Name Service

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October 29, 2017

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Ethereum Name Service (ENS) launched on mainnet on May 4, 2017. At launch, ENS featured an automated registrar process allowing anyone to easily and cheaply register names ending in “.eth” using an auction process.

The auction system enabled anyone to purchase a .eth addresses of at least seven characters in length. Since its launch over 618,000 auctions have been started, and 3,298,707 ETH have been deposited for bids. The ENS is evolving, and within the next two years, a planned upgrade will allow for auctions of shorter names less than seven characters.

What exactly is ENS?

The Ethereum Name Service brings readable Ether addresses to the public. This is a key step towards cryptocurrency mass adoption. Normal Ether addresses are 42 digits long and can be very confusing for beginners. ENS enables anyone to create a much more user friendly address like for example JohnDoe.eth.

ENS domains as an asset

Since many Ethereum names are being purchased at ENS auction, new owners of .eth names have been seeking efficient tools enabling them to transfer ownership of their newly acquired .eth names to second hand purchasers.

As some Ethereum names are very valuable, an escrow service for transfer of title to these names has been important, but no such service has existed. Buyers and sellers seeking to transfer ownership have been required to rely on trust, custom smart contracts, or legal contracts provided by attorneys.

Over the past six months since the launch of the ENS, individual .eth names have auctioned for astronomical sums. Some of the more expensive .eth names have included exchange.eth claimed for 6,660 ETH ($609,000), foundation.eth went for 300 ETH ($27,000), and weather.eth was auctioned for 101 ETH ($9,000).

Many of the .eth address purchases are made with the intent to resell or squat the name in order to seek profit from its resale at a much higher price to subsequent purchasers in what many speculators anticipate will be a thriving second hand market for .eth addresses. Furthermore, there’s been some criticism raised that the ENS system in its current form encourages .eth address name squatting.

In any event, there has been no shortage in speculators seeking to profit from what many see as a modern version of the pets.com domain name controversy from the early 2000’s during the initial Internet bubble boom.

First ENS domain marketplaces

Name Bazaar, the first public ENS marketplace, recently launched its service. This platform provides an alternative way to transfer ownership of .eth addresses, enabling Ethereum address holders to easily transfer ownership of Ethereum names using a completely trustless smart contract based interface.

This allows for a much more streamlined way for .eth address buyers and sellers to decrease transaction costs involved in the sale and transfer of ownership of .eth addresses. All that’s required to transfer ownership is an Ethereum address through the MetaMask or Parity browser extensions.

Alternatively, ENS domains can also be traded at the /r/ENSMarket subreddit. At the time of writing, it has over 300 subscribers and several hundred posts of people aiming to sell ENS domains.

Currently there are over 2900 DNS domain registrars all around the globe, which is the protocol for standard web addresses we use in our daily life.

As the Ethereum adoption rate keeps increasing, there’ll soon probably also exist a much greater pool of ENS domain registrars.

Lebanon’s Central Bank Governor Disses Bitcoin at Digital Currency Launch

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October 29, 2017

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The bank that prints the money used today in Lebanon plans to launch its own digital currency.

Announced Thursday by Riad Salameh, the governor of the Banque du Liban, Lebanon’s central bank, it’s not yet clear if the project will be based on blockchain technology, though the idea appears to have been addressed in conversation.

According to local news source The Daily Star, Salameh used the opportunity to underscore why cryptocurrencies, which utilize blockchain, were ineffective in serving as national currencies. The comments were made at the 7th Corporate Social Responsibility Lebanon Forum, as part of the conference’s opening ceremony.

Salame told attendees:

“These [bitcoin] are not currencies but rather a commodity whose prices rise and fall without any justification. For this reason, BDL has banned the use of this currency in the Lebanese market.

Elsewhere, he dismissed the cryptocurrency as “unregulated,” while reportedly referring to the technology as a threat to current payment systems.

However, Salame was bullish on the idea that money will eventually be digitized.

“We understand that electronic currency will play a prominent role in the future. But BDL must first make the necessary arrangement before taking this step and develop [a] protection system from cybercrime,” he said.

No further details nor timeline were reported, and as such, it’s possible that Banque du Liban will use other forms of technology to create a centralized digital currency.

Such an option has been pursued in countries like Ecuador and Sweden, though other countries, such as China, are exploring the use of blockchain.

Still, more details should be forthcoming about Lebanon’s plans, that is if a proposed timeline is any indication.

According to the report, Salameh said the digital currency will “be available in the next few years.”

The Basics on FACTS: A New Model for Compliant ICOs

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October 29, 2017

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Jaron Lukasiewicz is a co-founder of WRKFLOW, an advisor to several blockchain companies and the founder of Coinsetter, a cryptocurrency exchange sold to Kraken FX.

In this opinion piece, Lukasiewicz proposes a way for initial coin offerings to avoid running afoul of securities laws while retaining the practical commercial advantages of tokenization.

A few blockchain companies have recently been touting a “legal” or “compliant” ICO.

After digging into the details, however, I am realizing that these ICO teams have very little understanding of SEC requirements, and that their token sales are not compliant.

This isn’t surprising. Most entrepreneurs are (rightly) more focused on building a business than understanding regulation, and this is not limited to blockchain entrepreneurs. That said, companies that are raising funds through an ICO are navigating treacherous waters, and it’s important for entrepreneurs to have a game plan that keeps their regulatory risk low.

I have spent the last six months devising a strategy for launching a compliant ICO, which would 1) comply with SEC rules, 2) maintain the usability of the underlying token and 3) enhance the terms currently being offered to investors. After countless hours spent getting here, I would like to propose a strategy for how an SEC-compliant ICO could be accomplished.

I am calling this ICO model FACTS, for Fair and Compliant Token Sale.

Stepping back

Before I lay out the strategy, I would like to explain why creating a compliant ICO has been a challenge in the first place.

Most ICOs to date have operated under the presumption that the instrument being offered is a “utility token,” not a security, to which SEC rules would not be applicable.

There is a strong point to be made here. However, there are certain assumptions that come alongside the utility token argument that most companies are not following.

These assumptions include:

The product is launched and currently usable. Most companies do not have a usable version of their product available for tokenholders at the time of their ICO. It’s difficult to claim that a token currently has utility when it cannot be used for several months or more.
Tokens are purchased by the platform’s users. Most ICO tokens are being purchased by investors seeking profit, not users of the underlying platform. ICOs also seem to fundamentally be a capital-raising activity, which would likely be under the SEC’s jurisdiction.

Many will agree that the pure utility token argument has holes in it, and when one looks at the regulatory risks assumed upon taking this approach, some crypto entrepreneurs begin looking for another option that is more compliant. Unfortunately, things don’t get clearer or easier when one looks to the SEC’s rules for workable solutions.

To that end, let’s look at the idea of offering a “security token” that will remain compliant with U.S. securities laws.

Taking it straight from the dragon’s mouth, “Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC.”

Unusable tokens

Let’s start by tossing out the option of registering tokens with the SEC, as that would imply that a token is listed on a stock exchange, held in cold storage and no longer transferrable in the peer-to-peer realm.

This option also assumes that a company can even get its token listed on a public stock exchange in the first place. In short, registration with the SEC is not a viable route.

If a security token will not be registered, then it must qualify for an exemption. Most private token sales would fall under Rule 506(c) of Regulation D, which would restrict token sales to verified accredited investors and add transfer restrictions. Most ICOs today are already self-restricted to accredited investors, and when they are done alongside a Reg D filing, many people would suggest they have executed a “compliant” ICO.

Unfortunately, Reg D offerings come with additional baggage.

After the offering, a Reg D security token would have to comply with ongoing restrictions, including a 12-month lockup and a limitation on token transfers solely to other verified accredited investors, which would need to be monitored.

One may ask: How exactly is a token to be used in commerce when it can only be accessed by accredited investors? Should the use of decentralized software be limited to the wealthy? Reg D restrictions cause a token to become totally inaccessible by most people, and frankly, unusable in general.

We now find ourselves in a situation where we must choose between either creating a non-compliant utility token that is likely subject to securities laws, or a useless security token that doesn’t work in commerce.

The FACTS ICO model is a solution to this conundrum.

The FACTS approach

FACTS is a two-token ICO model that supports both crypto entrepreneurs and SEC regulators with a model that fits into current laws every step of the process.

The model utilizes two tokens: a security token and a utility token, each created within a two-part token sale, outlined below.

Part 1: A company creates a security token, which is offered to the public through an ICO. The ICO is filed with the SEC under Reg D and is restricted to verified accredited investors, who will all have a 12-month lockup period on their security tokens, which can only be transferred to other accredited investors afterwards.

This security token would give investors equity in the company (a cumulative 10% of the company in the form of non-voting stock might be a good industry standard), and it fundamentally gives investors a better deal in the ICO.

You may be asking how a security token solves any of the problems I mentioned before. Now for Part 2…

Part 2: Once the ICO is finished, the company then makes a distribution of utility tokens to its ICO investors in the form of a dividend, more specifically, a property dividend. The total value of utility tokens distributed to investors will match their investment amounts in the ICO (i.e. investors should receive the same number of utility tokens that they would receive in a typical ICO).

These utility tokens are not a security, and can be transferred or used by token holders at their discretion. While only accredited investors can participate in the ICO itself (which is arguably an investment subject to securities laws anyway), Part 2 of the FACTS method democratizes the use of utility tokens permanently thereafter.

Through the FACTS model, ICO investors receive two tokens for the price of one.

Furthermore, because utility tokens are distributed to investors in the form of a dividend, the FACTS model offers a clean series of transactions that fits within the existing legal framework.

Some final notes

After exploring many other structures and strategies for ICOs, I believe that FACTS is the only model today that can logically allow ICOs to become a more mainstream financing method.

Going forward, this model would benefit from affirmative guidance from the SEC, as well as further research on how it would apply in other countries with their respective securities laws. It would also be worth exploring whether Regulation Crowdfunding can be applied to the model to democratize investment into the ICO itself.

A final disclaimer: I am not a lawyer, this is not legal advice and you should consult an attorney before proceeding on any ICO methodology.

UBS CEO: Blockchain to Play ‘Big Role’ in Reshaping Industry

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October 29, 2017

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sergio_ermotti_500 — Sergio Ermotti, CEO of Switzerland's biggest bank UBS, speaks during a press conference in Zurich, Switzerland, Tuesday, February 2 2016. Swiss Bank UBS UBS Group net profit for 2015 increased 79 percent year on year to CHF 6.2 billion. (KEYSTONE/Ennio Leanza)

Add the CEO of Swiss banking giant UBS to the “blockchain not bitcoin” crowd.

In a new interview with CNBC this week, Sergio Ermotti expressed doubt about cryptocurrencies, stating that the role of the technology still “needs to be defined.”

However, he was more bullish on private distributed ledger technologies, noting his company has already invested in a partnership with IBM to run international trade transactions on a blockchain.

He told CNBC:

“I believe there is a future for blockchain technology, and [that] technology will play a big role in changing and reshaping our industry.”

With the remarks, Ermotti joins other financial sector luminaries, such as Jamie Dimon and Warren Buffett, who have recently cast doubt on both bitcoin and the cryptocurrency asset class more broadly. Although, he perhaps hinted most at the divide between permissionless blockchain technologies, like bitcoin, and bank-sponsored alternatives.

UBS and IBM’s joint project, for example, is called Batavia, and it has been built on the open-source Hyperledger Fabric framework.

IBM announced that Bank of Montreal, CaixaBank, Commerzbank and Erste Group had all also joined the project earlier this month.

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Rapid Rise of Cryptocurrencies and Blockchain Technology

Cryptocurrency Regulations Around the World

Blockchain Regulations in the U.S.

Blockchain Regulations in Europe

Regulating Blockchain Technology Worldwide

E-Residency Benefits

Vitalik Buterin Weighs In

Estonia’s ICO In Doubt

Brief details of the company’s plans

Performance of Bitcoin and other digital currencies in the market and possible effects of the ban

What exactly is ENS?

ENS domains as an asset

First ENS domain marketplaces

Stepping back

Unusable tokens

The FACTS approach

Some final notes

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