Coin News

Several venture capitalists (VCs) and entrepreneurs have been petitioning federal authorities to see certain virtual currencies in a “different light.”

Right now, many cryptocurrencies are in danger of being classified as “securities,” which would place them under strict regulatory scrutiny. Working to change this, venture capital firms Andreessen Horowitz and Union Square Ventures have gathered a team of lawyers and investors known as the “Venture Capital Working Group” to meet with the U.S. Securities and Exchange Commission (SEC) to develop what they call a “safe harbor” for specific digital currencies and establish long-term proposals for how they should be viewed and handled.

The New York Times alleges that several regulators are considering placing well-known cryptocurrencies — including ether, the world’s second-largest digital asset — in the securities category, which may cause their prices to fall drastically.

Richard Levin, a lawyer who’s worked with various blockchain and cryptocurrency ventures, described the meeting as “crucial” to the safety of digital assets and their respective users.

“It’s a ‘come to the lord’ moment,” he explained. “We are seeing a watershed moment in which many firms in the digital asset community who may have been ignorant of the law — or poorly informed — are now coming to terms with the fact that they are subject to regulators.”

While details surrounding the meeting remain largely confidential, the group says it’s trying to garner “utility token” classifications for many specific cryptocurrencies.

Many virtual entities have been introduced through initial coin offerings (ICOs). The process involves a team of entrepreneurs selling these virtual assets to raise funds for future projects. Generally, these currencies work as “internal payment methods” in the software the entrepreneurs create.

For a coin to classify as a security, users who buy it must have the opportunity to transform money into capital and garner profit by owning the asset without taking physical possession of it.

Securities are typically designed to be “shares” or stakes in a company, while utility tokens represent “access to [a] company’s product or service.” In bearing more practical uses, utility tokens are usually exempt from securities regulations.

Since 2017, over $6 billion in revenue have been generated through initial coin offerings, and most trade via unregulated exchange platforms. Many investors claim that these coins, in serving as payment methods, carry utilities, and should not be classified as securities or investment contracts.

But Jay Clayton — chairman of the SEC — disagrees, and believes every token offered through an ICO should be officially “registered as a security.” Very few are, and the SEC has sent dozens of subpoenas to both individuals and ventures involved in cryptocurrency, requesting data regarding how certain digital assets were marketed or issued.

Investments that fall into the securities category must have paperwork filed with registered exchanges. For the most part, entities like bitcoin, litecoin and monero can’t be placed here, as they were not originally distributed through ICOs. Furthermore, new coins are given daily to computers that work to extract them and maintain current networks.

While ether now follows a similar pattern, the coin is still in danger, primarily due to Ethereum’s past of garnering funds through ether token “presales” — events now classified as ICOs. The Venture Capital Working Group is arguing that ether “has become so decentralized,” it should not be labeled as a security, and that should it ever achieve “full decentralization,” it must be exempt from all future securities laws.

The group says it has the support of many “key players” in the digital currency and blockchain arena. Nevertheless, regulators have been slow to accept the proposal, and at press time, it is unclear what results will arise. Bitcoin Magazine will provide further updates on this story as they occur.

Several venture capitalists (VCs) and entrepreneurs have been petitioning federal authorities to see certain virtual currencies in a “different light.”

Right now, many cryptocurrencies are in danger of being classified as “securities,” which would place them under strict regulatory scrutiny. Working to change this, venture capital firms Andreessen Horowitz and Union Square Ventures have gathered a team of lawyers and investors known as the “Venture Capital Working Group” to meet with the U.S. Securities and Exchange Commission (SEC) to develop what they call a “safe harbor” for specific digital currencies and establish long-term proposals for how they should be viewed and handled.

The New York Times alleges that several regulators are considering placing well-known cryptocurrencies — including ether, the world’s second-largest digital asset — in the securities category, which may cause their prices to fall drastically.

Richard Levin, a lawyer who’s worked with various blockchain and cryptocurrency ventures, described the meeting as “crucial” to the safety of digital assets and their respective users.

“It’s a ‘come to the lord’ moment,” he explained. “We are seeing a watershed moment in which many firms in the digital asset community who may have been ignorant of the law — or poorly informed — are now coming to terms with the fact that they are subject to regulators.”

While details surrounding the meeting remain largely confidential, the group says it’s trying to garner “utility token” classifications for many specific cryptocurrencies.

Many virtual entities have been introduced through initial coin offerings (ICOs). The process involves a team of entrepreneurs selling these virtual assets to raise funds for future projects. Generally, these currencies work as “internal payment methods” in the software the entrepreneurs create.

For a coin to classify as a security, users who buy it must have the opportunity to transform money into capital and garner profit by owning the asset without taking physical possession of it.

Securities are typically designed to be “shares” or stakes in a company, while utility tokens represent “access to [a] company’s product or service.” In bearing more practical uses, utility tokens are usually exempt from securities regulations.

Since 2017, over $6 billion in revenue have been generated through initial coin offerings, and most trade via unregulated exchange platforms. Many investors claim that these coins, in serving as payment methods, carry utilities, and should not be classified as securities or investment contracts.

But Jay Clayton — chairman of the SEC — disagrees, and believes every token offered through an ICO should be officially “registered as a security.” Very few are, and the SEC has sent dozens of subpoenas to both individuals and ventures involved in cryptocurrency, requesting data regarding how certain digital assets were marketed or issued.

Investments that fall into the securities category must have paperwork filed with registered exchanges. For the most part, entities like bitcoin, litecoin and monero can’t be placed here, as they were not originally distributed through ICOs. Furthermore, new coins are given daily to computers that work to extract them and maintain current networks.

While ether now follows a similar pattern, the coin is still in danger, primarily due to Ethereum’s past of garnering funds through ether token “presales” — events now classified as ICOs. The Venture Capital Working Group is arguing that ether “has become so decentralized,” it should not be labeled as a security, and that should it ever achieve “full decentralization,” it must be exempt from all future securities laws.

The group says it has the support of many “key players” in the digital currency and blockchain arena. Nevertheless, regulators have been slow to accept the proposal, and at press time, it is unclear what results will arise. Bitcoin Magazine will provide further updates on this story as they occur.

When Arthur Breitman, cofounder of Tezos, published a white paper on the cryptocurrency project in September 2014, he listed the author as L.M. Goodman. Later, when Breitman disclosed that he was the real author behind the work, many wondered why he used a pseudonym. 

As it turned out, at the same time he started working on Tezos, a project that went on to raise $232 million in an initial coin offering (ICO) in July 2017, Breitman was working at investment bank Morgan Stanley. He was also registered as a broker-dealer with the Financial Industry Regulatory Authority (FINRA), a self-regulatory body with oversight of dealers and brokers in the U.S.

FINRA requires registered securities professionals to let their employers know about any for-profit business they are conducting on the sidelines. Breitman, who left Morgan Stanley in 2016 and is no longer registered with FINRA, neglected to inform his employer about Tezos, and the fact he used a pseudonym on the white paper indicates he may have been trying to conceal his involvement.

These and other details of the Tezos project were brought to light in October 2017, when Reuters published a full report on the project, thereby putting Tezos on the radar of regulatory bodies, such as FINRA and the U.S. Securities and Exchange Commission (SEC).

Now, according to an April 19, 2018, report by Reuters, as part of an April 18, 2018, settlement, FINRA has fined Breitman $20,000 and suspended him from associating with broker-dealers for two years over allegations that he made false statements about the Tezos project during his time at Morgan Stanley.

The question is, how big a deal are these punishments, and will they have any impact going forward on the Tezos project, which has yet to launch?

Relatively Small Fine

FINRA and SEC fines are not uncommon. Anyone who checks the broker records of institutions like RBC, Vanguard and Bank of America, where people in the U.S. and Canada place their money, will see that these financial firms all have dings against them, and, just as Breitman did, most individuals settle by either not confirming or denying the charges.

A look at FINRA’s monthly rundown of disciplinary actions makes it clear that Breitman’s fine of $20,000 is on the low end. Many more of the fines are in the range of hundreds of thousands, if not millions, of dollars. In comparison, this fine appears to be nothing more than a minor slap on the wrist.

More notable is the fact that Breitman was barred from the securities industry for two years. Few people are barred from the securities industry for any length of time, and two years is an upper limit, according to FINRA’s sanction guidelines, which states that “absent extraordinary circumstances, any misconduct so serious as to merit a suspension of more than two years probably should warrant a bar (of an individual) or expulsion (of a member firm) from the securities industry.”  

Potential Problems

By definition, a broker-dealer is someone who facilitates security trades on behalf of  investors. The ban essentially means that Breitman cannot associate with any company that is buying or selling securities over the next two years, unless he gets a special waiver. Even then, he cannot be directly associated with the business aspect (deals, committee meetings, financial activities, etc.) of a securities-related company.

If the Tezos tokens, known as “tezzies,” are deemed a security, this may pose a problem for Tezos down the road. Earlier this year, SEC Chairman Jay Clayton stated that all ICO tokens were securities. Some venture capitalists are lobbying for exemptions for some tokens, but currently the SEC is classifying all ICOs as securities. If the SEC issues a ruling to that effect, then all ICO projects would then have to register with the SEC.

What that means is, if Breitman is suspended by the industry, he may have to eventually distance himself from the Tezos project. Robert Hockett, Edward Cornell Professor of Law at Cornell Law School, told Bitcoin Magazine that if Tezos is engaged in a business that the SEC deems to be the securities business, then Breitman will not be permitted to have any affiliation of that sort with that company, “or maybe better put, that company will not be allowed to be associated with him in any way,” he said.

Tezos actually consists of two entities: Tezos Foundation, a Zug-based nonprofit that oversaw the Tezos ICO; and Dynamic Ledger Solutions (DLS), a Delaware-based company under the control of Breitman and his wife, Kathleen Breitman, that owns and oversees the development of the Tezos software. Although the two entities are separate, they are also connected; for instance, the Breitmans went after the Tezos Foundation last year to get its former president deposed. If DLS is shown to be profiting off the buying and selling of securities, then Breitman may be restricted from actively participating in the business.

Hockett warns, “The securities laws and the SEC define ‘affiliation’ broadly for these purposes.” More importantly, he also points out that “we won’t know the full scope of Mr. Breitman’s suspension until the FINRA order is made public.”  

In a statement to Reuters, Sarah Lightdale, an attorney for Breitman, played down the settlement. “The settlement with FINRA is unrelated to and has no impact on the launch of the Tezos network,” she said. Then added, “Arthur cooperated fully with FINRA at all times and Arthur is pleased to put this personal matter behind him.”

Brazil is home to half of South America’s population and wealth, and right now, the country’s largest investment broker firm may be primed to launch an over-the-counter (OTC) bitcoin exchange.

XP Investimentos has not made any official announcements on the matter, but according to reports in Portal do Bitcoin on Tuesday, April 17, 2018, the investment firm is behind a new company called XDEX with around $7.5 million in capital. Portal do Bitcoin did some research and connected the two the companies.

As the story goes, XP previously registered a new company called XP Coin Intermediacao. In November 2017, at the time cryptocurrency markets were on fire, XP Coin changed its name to XDEX and got a $1.5 million influx of cash. Later, in February 2018, it received another $6 million.

OTC Trading

While not much is known about the new cryptocurrency exchange, Portal do Bitcoin claims that a source unwilling to expose his or her identity said that XDEX was planning to do an OTC market, meaning it would focus on large fiat and Bitcoin transactions — in other words, heavyweight investors.

OTC simply means that the trade does not show up in the order books, like it does on exchanges such as GDAX or Kraken. Instead, in an OTC scenario, XP would act as a middleman connecting someone who wants to sell a large stash of bitcoin with a buyer who has a large sum of cash. The advantage of selling OTC is that traders can lock in their gains with one big trade; whereas if they were to sell through an exchange, the price could start slipping as the order was filled. For its part, XP would take a cut in brokering the deal.

In speaking with Bitcoin Magazine, Claudio Rabin, the reporter at Portal do Bitcoin who broke the story, said that an executive at one of the largest cryptocurrency exchanges in Brazil informed him that XP was already conducting OTC cryptocurrency trades.

XP the “Unbank”

For years, XP fancied itself as an alternative to traditional banking. In 2015, the investment firm went after new clients with an anti-banking ad campaign that included a commercial dubbed “desbancarize seus investimentos,” an expression that roughly translates to “unbank your investments.”

But that was before Brazil’s largest bank, Unibanco Holding, acquired a 49.9 percent stake in XP for $2 billion in May 2017. Since that time, XP has begun taking a keen interest in cryptocurrencies. In September 2017, the firm registered the “XP Bitcoin” brand at the National Institute of Industrial Property, an early hint that it was planning to open a future bitcoin brokerage. Soon after, in November 2017, XP hired Brazilian digital currency expert Fernando Ulrich as its chief economist of cryptocurrency, another strong signal the brokerage was inching into the space.

Brazil has been light on cryptocurrency regulation. In December 2017, Brazil’s central bank and securities regulator issued a joint warning to investors that virtual currencies had no official oversight in the country. In January 2018, Brazil’s securities regulator prohibited local investment funds from buying cryptocurrencies, saying cryptocurrencies cannot be considered financial assets. Now, with the country’s biggest financial players getting into the game, regulators may have reason to take a stronger stance.

In response to a request for comment from Bitcoin Magazine, a spokesperson for XP said in an email, “We have nothing to say about this matter.” Its website, Xdex.com.br, was unavailable at press time.