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Howey Schmowey – The Real Answer is to Update Securities Regulations

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David Weisberger is co-founder and CEO of CoinRoutes and a veteran of building trading desks and financial technology businesses. The opinions expressed in this article are his own, and do not reflect CoinDesk’s position.

The following article originally appeared in Institutional Crypto by CoinDesk, a free newsletter for the institutional market, with news and views on crypto infrastructure delivered every Tuesday. Sign up here.


This month there have been two SEC enforcement actions that made headlines in the crypto community. One was the case against messaging platform Kik and their Kin token sale; the other was the action against holding company Longfin. In the first case, while investors lost money, it is unclear that Kik misled them about the potential for the Kin token to be used or about its fundamental value proposition. In the second case, however, the allegations are that Longfin committed clear fraud by misrepresenting their crypto business.

There is no doubt the Longfin case was dealing with a security, since the company went public via the arduous and little-used provision of Reg A+. The problem is that the management allegedly made fraudulent claims about their crypto-oriented business. The SEC charged that investors lost money because they were misinformed about Longfin’s business prospects. The fact that they were a security provided almost no protection whatsoever. (Protection will be limited to potential restitution from enforcement or shareholder lawsuits, which will be small and take place well after the fact.)

In the Kik case, they issued a token that, based on the letter of the law, might well be a security, but they did not follow securities laws when selling the token. Purchasers of the Kin token also lost a lot of money, but most of that loss is related to the collapse of the token market at large, rather than issues with the token itself.

Juxtaposing these two cases makes one thing very clear:

Whether or not an asset is deemed a security or not has little to no relationship to the ability of regulators to protect investors against fraud.

The reality is that raising money based on either outright fabrication or by materially misrepresenting the business can be attacked both by criminal prosecution and civil litigation.  Securities laws provide help in that regard in cases where the representations made by the issuer deviate from what is required, and those representations are material to the investment decision. When required disclosures are not relevant to the investment decision, those rules provide little help. This leads directly to the second point:

If tokens issued by corporate entities are to be deemed securities, required disclosures should be updated.

Current required financial disclosures are wholly inadequate to provide investors context for the value of tokens being used by emerging companies for financing. In this case, for example, it is unclear that Kik’s disclosures of the prospects of their token were problematic, but it is very clear that the required disclosures for securities, had they been followed, would have shed little to no light on the investment prospects for the token. Securities disclosures pertain exclusively to the issuer and their finances rather than clarifying the likelihood that the token being issued would gain acceptance. Unfortunately, Kik’s company finances would have provided limited information to the central question that Kin token holders needed to know: whether or not Kin would become highly used, either in their own network or on others.

Lastly, it should be pointed out that there is an inherent double standard in the US securities laws: If a company is already a security (whether OTC or listed), then non-accredited investors can be duped by inadequate disclosures and use of the same techniques that unscrupulous ICO promoters used. On the other hand, law-abiding founders of new companies are restricted from raising capital via tokens from those same investors.

To illustrate, consider the cases of Long Island Iced Tea (which became Long Island Blockchain) and Riot Blockchain (formerly Bioptix). In both cases, moribund public companies changed their name and announced business “pivots” to blockchain technology. In neither case was the future business direction spelled out in detail, nor were there anything resembling the type of disclosures regulators want to see from new companies. In both cases, the hype (in the short term) attracted large numbers of the investing public, propelling the stocks higher. In both cases, there was nothing resembling the sort of disclosures made by principled founders of blockchain products, yet the losses to investors were very real. The sole difference between these examples and the average ICO from 2017 is that both of those companies were already publicly traded.

Sadly, I don’t expect securities laws to undergo an overhaul in the U.S. anytime soon, so we are likely to see America fall behind the rest of the world in terms of capital markets innovation. If, however, U.S. regulators were to take action, a good start might be to create a subclass of securities for utility tokens issued to fund “for profit” enterprises. If such a designation (informally or formally) were established, the SEC could work with the industry to create appropriate disclosures and rules for those assets. I am sure that groups such as the Wall Street Blockchain Alliance or ADAM would be happy to help, as would firms such as Messari, which is building a private marketplace of project disclosures.

This approach would have another benefit, which would be to help ease the SEC into regulation of the exchanges and dealers that trade these tokens. Principles such as “Best Execution” which are sorely lacking in these markets could then be promoted, with the likely result of increased trust (and therefore volumes) in the crypto markets overall.

SEC building image via Shutterstock

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Bitcoin Retakes $11,000 Following Turbulent Week in Crypto

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Charts Courtesy of Coin360.com

Charts Courtesy of Coin360.com

July 20 — Bitcoin (BTC) has retaken the $11,000 price point on the heels of a turbulent week. 

Charts Courtesy of Coin360.com

Charts Courtesy of Coin360.com

After a bull market at the end of June brought the price of BTC to almost $14,000, the coin had largely been maintaining between $10,000 and $13,000 for most of the past month, briefly cracking $11,000 on July 15 before slipping below the $10,000 price point on July 16. For the past three days, BTC has been in the $10,000 range, but had faltered at the $11,000 resistance until now.

Charts Courtesy of Coin360.com

Charts Courtesy of Coin360.com

The past week has seen some major hurdles for cryptocurrency at large, particularly within the United States. On July 11, President Donald Trump voiced his opposition to cryptocurrencies, particularly BTC and Facebook’s planned Libra, in a series of tweets, saying:

“I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air.” 

Trump’s tweets came days before hearings on Facebook’s Libra before the US Senate Banking Committee on Tuesday, July 16 and the House Financial Services Committee Wednesday, July 17. The two hearings left little doubt as to Congress’s attitude toward Libra, which was overwhelmingly negative. Representative Madeleine Dean commented:

“It’s tough to trust when the collection, storage and misuse of the information of your customers generated a $5 billion fine.”

While Libra’s outlook may be bleak, the significance of the hearings for Bitcoin — with a market cap of $196,266,374,749 as of press time, the largest cryptocurrency — has remained unclear. 

Today’s price rally may mean that the storm has passed for BTC.





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Coinbase CEO Wants Firm to Move Beyond Trading in Next 5 Years

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Brian Armstrong, CEO of major American crypto exchange and wallet service Coinbase,  believes that the firm will be less about trading and more about adoption five years from now.

Armstrong wants the firm to connect people in crypto industry

 In an AMA session on July 19, Armstrong presented his vision of the company in five years, claiming that he sees Coinbase as not just a crypto trading service provider, but rather a more universal entity driving adoption to crypto.

Armstrong pointed out Coinbase’s mission to help grow the global crypto economy by connecting people in the market and expanding crypto community to help people use cryptocurrencies for more than just buying and selling. In this regard, Armstrong cited some recent Coinbase developments, such as incentivized crypto educational program Coinbase Earn, as well as preparations to soon enable crypto lending and margin trading on Coinbase. Armstrong explained:

“In five years I hope that we’ll have it even further beyond that. There’ll be thousands of companies that’ll be crypto-first.”

Armstrong supports people who left Coinbase to run their own crypto projects

As a part of Coinbase’s crypto adoption driver mission, Armstrong has also expressed his positive stance to former Coinbase employees who decided to leave the company to launch a new successful crypto project. Coinbase CEO noted the existing term of Coinbase mafia, recalling roughly ten people who have quit Coinbase to run successful crypto companies.

Armstrong appeared to encourage these former employees, claiming that he really wants people to learn from Coinbase and spread their knowledge to bring more adoption. “We‘re just gonna keep doing more and more of that,” Armstrong said, still adding that Coinbase is a multi product company.

On July 12, Armstrong said that a recent anti-Bitcoin (BTC) tweet by United States President Donald Trump unlocked another achievement for crypto industry, indicating that crypto industry is independent of global powers and that those powers cannot shut crypto down.





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Bitcoin Approaches $11,000 With All Top 20 in Green

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Saturday, July 20 — crypto markets have seen another upward move, with all top 20 coins by market cap seeing major gains, while Bitcoin (BTC) has approached $11,000 mark again.

Market visualization from Coin360

Market visualization from Coin360

After dipping below the $11,000 threshold on July 14, Bitcoin has approached the price point today, with its intraday high of $10,944, according to data from CoinMarketCap. The biggest cryptocurrency added 3.7% to its price to trade at $10,922 at press time. As Bitcoin has seen significant volatility this week, with its price having dipped below $9,500, the cryptocurrency is down around 3% over the past 7 days at press time.

Bitcoin 24-hour price chart. Source: Coin360

Bitcoin 24-hour price chart. Source: Coin360

Ether (ETH), the second cryptocurrency by market cap, is up over 5% and trading at $232 at press time. The top altcoin is down 13.4% over the past 7 days.

Ether 7-day price chart. Source: Coin360

Ether 7-day price chart. Source: Coin360

Ripple (XRP), the third top cryptocurrency by market cap, added 6.4% to trade at $0.339, also seeing a notable growth over the past 7 days, adding up to about 2.6%.

Ripple 7-day price chart. Source: Coin360

Ripple 7-day price chart. Source: Coin360

Bitcoin SV (BSV), the ninth top cryptocurrency by market cap, has added over 25% to its value today, seeing the biggest growth among the top 20 coins by market cap.

As of press time, total market capitalization amounts to $298 billion after that number dropped below $250 billion earlier this week. Daily trade volume amounts to around $63 billion.

The new wave of green on crypto markets follows a recent bullish prediction by managing director and quant strategist at Fundstrat Global Advisors Sam Doctor, who suggested that much-anticipated Bakkt’s Bitcoin futures contracts will launch in Q3 2019.

Additionally, India’s Minister of State for Finance Anurag Thakur said yesterday that there is no legislation in India that expressly bans citizens from using cryptocurrencies.

Keep track of top crypto markets in real time here





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