2018 June 18 - Volume.2 Issue.24

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2018 June 18 - Volume.2 Issue.24

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Ether Escapes But SEC Looks to Herd ICOs Under Regulated Oversight

While the US Securities and Exchange Commission (SEC) found that, Ethereum, in its current state can no longer be classified as a security, the initial sale facilitated by the Ethereum Foundation likely was a security offering. But the SEC is paying attention and selling tokens to U.S. investors is no longer going to be unregulated - or such is the tone being struck by the regulator. The initial coin offerings (ICOs) that want to raise money from the U.S. investors will have to sell the tokens in either a private or a public offering compliant with the SEC regulations, and only marketplaces registered as an Alternative Trading System (ATS) will be able to provide liquidity for compliant tokens on the secondary market.

William Hinman, the Director of the Division of Corporation Finance at the Securities and Exchange Commission (SEC) made headlines last week when he declared that, based on his understanding, Ether is not a security and therefore is not subject to the securities laws in the U.S. However, based on Mr Hinman’s comments, the initial sale of Ether in 2014 by the Ethereum Foundation was almost certainly a security offering.

Mr Hinman believes that digital assets that were originally offered in a securities offering can become non-security utility tokens if the platform is sufficiently decentralized “where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts”. Mr Hinman said “when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.”

It is now clear that the initial sale of tokens for fundraising purposes is performed in a centralized manner and qualifies as a security offering in the U.S. Jay Clayton, Chairman of the SEC, spoke to CNBC just prior Hinman’s comments and said that any token that was used in a fundraising process and can give investors a return, or investors can get a return on the secondary market by selling the token to someone else, qualifies as a security. Mr Clayton said that these tokens can be sold in both private placement or public offering but issuers must take the responsibility the SEC laws require. In other words, from now on, the initial sale of tokens - to US investors at least -  will be regulated unlike in the case of Ethereum in 2014.

The initial coin offerings (ICOs) or other tokenized fundraising methods that want to raise money from investors in the U.S. will have to sell the tokens in either a private placement or in a public offering. The most common method to comply is to use one of the exemptions to the registration requirement under the Securities Act. For the private placement, the exemption is Regulation D, Rule 506(c) and for public offering, the exemptions are Regulation A+, Regulation CF and Regulation S (see table). Regulation D only allows to raise money from accredited investors and Regulation S can only be used to sell to the investors outside of the U.S. Therefore the most common exemptions to sell tokenized securities are Regulation A+ and Regulation CF.

The biggest drawbacks of Regulation A+ and Regulation CF is the maximum amount that can be raised at $50Mn and $1.07Mn respectively. The House of Representatives passed a bill in March that increases the limit of Regulation A+ offerings to $75Mn, which is now in the Senate to be discussed and then voted on. 

US SEC Filed Initial Coin Offerings Eye Over $2.2Bn Raise

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*Raise To Date / Raise Yet to Begin. Reg D implies Regulation D, Rule 506(c)

Regulation A+ also requires to file and qualify an offering statement (Form 1-A) with the SEC, which often costs upwards of $50,000 in legal fees. Securities sold through Regulation CF cannot generally be resold in public markets for the period of one year. The advertising of Regulation CF is also severely limited and regulated by the SEC.

Despite these limitation, there have been several companies that used these exemptions to raise money in a compliant way (see table). Telegram and Filecoin have raised nearly $2Bn combined by utilizing Regulation D, Rule 506(c). Gab and RideCoin are the most prominent examples of Regulation A+ offerings while Regulation CF offering is highlighted by Indeco.

Indiegogo partnered with MicroVentures to launch a platform for securitized ICOs that support multiple frameworks (Reg CF, A+, D, S). StartEngine created a new ICO structure called “Real Agreement for Tokens and Equity” (RATE) and offers three different securities exemptions (Reg CF, A+, D). As opposed to utility tokens, RATE offers both equity in the company and tokens. Unregulated ICOs became popular because they provide instant liquidity. tZERO and StartEngine Secondary have both announced their intentions to launch regulated secondary marketplaces in 2018 registered as alternative trading system (ATS). Kraken, Coinbase, Poloniex and Bittrex also voiced their intention to register as an ATS (Diar, May 21, 2018).

"At what point did ether stop being a security? Can it ever go back to being a security? What about other coins that did an ICO that aren't "decentralized"? - Tim Swanson, Post Oak Labs

US Securities & Exchange Commission ICO-Applicable Regulation Guidelines 

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US Exchange Differentiation Takes Back Seat as Coinbase Follows Suit

Coinbase's next to be listed cryptocurrency was met not with a bang, but a whimper, as the exchange announced it will soon list Ethereum Classic while the crypto community awaited an ERC20 token. The choice of listing the original Ethereum chain made pundits scratch their heads. But one might need not look further than the vested interests of the exchange's backers. The add may also elude to the next speculator opportunity as US-based exchanges vie for market share of the same coins rather than differentiate their offerings - not unlikely due to regulatory backlash fears.

An announcement made by Coinbase at the end of March this year set the stage that the exchange would begin supporting ERC20 tokens within months. But out of left field, the popular exchange announced last week that Ethereum Classic would be added, after initially deciding that it would not list the fork after the DAO hack that resulted into two coins - Ethereum (ETH) and Ethereum Classic (ETC) in 2016. Coinbase did allow users to withdraw their Ethereum Classic for a period of 6-months.


The listing of Ethereum Classic could be seen as slightly perplexing when placed against the mantra the exchange has been touting ever so long - an "Open Financial System." And Ethereum Classic is being geared towards the cryptocurrency of choice for the Internet of Things (IoT) - rather than part of the financial suite of products the exchange is eyeing. This direction for the cryptocurrency is being supported mainly by Digital Currency Groups investment arm, Grayscale, who is the sponsor of the Ethereum Classic Trust. Grayscale is one of the core financial backer of the Ethereum Classic Cooperative having earmarked a third of annual fees from the ETC Trust for a period of 3 years.


The listing of Ethereum Classic isn't likely to change the direction Coinbase is taking in the long-run. What it may imply, however, is that the slow moving bureaucratic cogs of regulation is making the exchange open up new revenue channels from fear of being left behind to the competition. Goldman Sachs-backed Circle has been adding new cryptocurrencies in quick succession. But lack of ability to withdraw makes Circle primarily a speculators market.

But the offerings across US-based exchanges who offer fiat trading pairs for non-ERC20 tokens all resemble each other - including Grayscales Over-the-Counter trusts (see table). With Digital Currency Group having backed all the major cryptocurrency exchanges, as well as Grayscale, it's not far-fetched to assume board meeting singing a similar tune. And it would make for an easier exercise for the sourcing of coins, as well as increased state-side liquidity.


itBit, however, received only last week approval by the New York State Department of Financial Services (NYDFS) to list four more cryptocurrencies on top their Bitcoin offering - Bitcoin Cash, Ethereum, Litecoin, and standing out of the pact, IBM-backed Stellar Lumens.

US Exchange Investors: Coinbase To Toe The DCG Party Line?

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US Based Cryptocurrency/Fiat Exchanges & Index Fund Options

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ZCash Investors Close to Coinbase

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Source: CrunchBase


Whether or not this trend opens the door for privacy coin ZCash to be added would be a good a guess as any. However, the apple doesn't seem to be falling very far from the tree - and ZCash does have the investment backing of none other than Coinbase Co-Founder Fred Ehrsam as well as DCG (see table).


The other answer for the ETC add could be that Coinbase looks to expand its currency offerings, all the while looking to avoid any regulatory questions surrounding ERC20 tokens as it gears its recent purchase of Paradex, a Decentralized Bulletin Board, for that very purpose - albeit excluding US investors at the start of operations.

Liquidity Near Non-existent on Majority of Traded Tokens

Cryptocurrency markets currently in search of a direction, all remain pinned to the peaks and valleys of Bitcoin. With over 1600 cryptocurrencies, 36 Trillion tokens, and $12Bn in traded volume at press time for 18 June 2018, it would seem as market appetite for speculation on tokens yet to deploy any form of function is still "healthy." But 55% of traded volume happen on majors (BTC, XRP, ETH, BCH, LTC) alone, while Tether USD accounts for another 17%. How does the remaining 30% of traded global volume fair?

70% of Global Trading Volume Occurs on 0.36% of Coins

Near 50% of Tokens Have Less Than $10K Trading Volume

Swarm Hits Roadblock on Tokenizing Private Equity

Swarm Fund, a security token platform startup, announced last week that it is launching tokens that represent equity in private tech companies. The company said that it would first offer tokenized equity of Coinbase, Ripple, Robinhood, and Didi. Swarm Fund reportedly partnered with venture capital firms and funds with direct and secondary access to the equity of these companies. Diar found that Swarm has primarily joined forces with SparkLabs and Andra Capital.

Swarm’s structure is set up in a way that the company never actually holds the equity therefore the capitalization table never even changes. It still shows the same legal entity that owns the private equity but the owner of the legal entity has changed. Swarm is effectively selling the shares in the legal entity that holds the company’s (Coinbase, Robinhood, Ripple, and Didi) equity.

Shortly after the announcement, the representatives of Coinbase, Ripple and Robinhood voiced their criticism of Swarm’s intentions and said that they were unaware of any such plans. Coinbase swiftly sent Swarm a cease and desist letter, which resulted in Swarm deleting all the references to Coinbase from the announcement. The question is whether Coinbase has the authority to stop Swarm from selling the equity in a legal entity that owns Coinbase’ shares. 

On the other hand, Coinbase clearly has the authority to demand to be withdrawn from any of the Swarm’s marketing communication or press releases.

The private companies in question will most likely create new provisions that restrict the ability to indirectly trade the equity on secondary markets. Coinbase, Robinhood, Ripple, and Didi are also in a much better position legally to challenge Swarm’s offering. Philipp Pieper, CEO of Swarm, said that the company's goal is to “democratize investing and introducing tokens that represent equity is a major step forward in this mission." It is questionable whether investing can be democratized by indirectly selling equity in companies that did not give consent to such transactions.

Swarm raised $5.5Mn in an initial coin offering (ICO) last year after failing to raise the goal of $55Mn. SWM, Swarm’s ERC20 utility token, is reportedly used for governance as well as the gas for transactions and incentives on the Swarm platform. Swarm also has a SRC20 token, which it claims is the first and only live security token standard that are backed by assets. The SRC20 token functions on private blockchain built on the Stellar protocol.

Xapo Earns New York BitLicense

Xapo, bitcoin wallet and a cold storage company, has been granted a BitLicense from the New York Department of Financial Services (NYDFS) on Thursday. Just a few days later, NYDFS approved Square, a mobile payment company, to receive the seventh BitLicense in existence following Circle, Ripple, Coinbase, bitFlyer and Genesis Global Trading.

BitLicense is special license necessary for any business that engages in virtual currency activity involving New York. Following its introduction in 2015, BitLicense received a fair share of criticism mainly because of the tedious application process, which is estimated to cost approximately $100,000 in legal and compliance fees. As a result, exchanges such as Kraken and Poloniex decided to leave New York.

Cryptocurrency Operations with BitLicense

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Ripple Tempers Expectations?

Ripple had been gaining many wins over the past year -  or so it seemed. Central Banks, commercial banks, and remittance operators all began lining up to test Ripple's software - a few dared to even experiment with xRapid that uses Ripple's XRP token for cross-border transactions.

But Ripple executives seem to be watering down expectations. “I will concede, we haven’t gotten there yet,” Ripple’s chief cryptographer David Schwartz said to Reuters. And Marcus Treacher, senior vice president of customer success, said that "the feedback from the banks is you can’t put the whole world on a blockchain" to the newswire.


If the statements by Ripple themselves weren't enough to put a damper on the company ethos, an article by Fortune titled "Ripple’s XRP Isn’t Making Western Union’s Payments Cheaper, CEO Says" certainly made things worse.

However, the statement made by the remittance leader CEO Hikmet Ersek seem to be highly premature citing a mere 10 transactions as the sample base using xRapid and XRP.

How much further Western Union will take to Blockchain, or atleast Ripple's XRP and the partnership isn't looking good.  “I don’t want to kill it" does seem that the discussion of killing it has already taken place.

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