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SEC: Some Stablecoins raise issues under securities laws

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According to Valerie Szczepanik, the senior advisor for the Securities and Exchange Commission, some stablecoins violate the securities laws.

According to Valerie Szczepanik, the senior advisor for the Securities and Exchange Commission, some stablecoins violate the securities laws. Valerie announced this at the Austin SXSW conference this on Friday last week.

 

Valerie Szczepanik about Stablecoins

Valerie categorized the current stablecoins available in the cryptocurrency space into three types; the first type that is linked to a real asset similar to gold, oil and real estate; second types that are linked with fiat reserves; and the third type are those which might cause problems under the securities laws.

 

She also mentioned that she has personally witnessed stablecoins controlling the price through certain types of mechanisms. The mechanism might be linked with the issuance of the stablecoin, its creation, the redemption of some other kind of digital currency that is linked with it or controlled with the supply and demand.

 

According to her, such kind of stablecoins in which a central authority controls the price variation time to time might fall into the securities laws.

 

Valerie Szczepanik also mentioned that the Securities and Exchange Commission will determine the certainty and circumstances of each stablecoins separately.

 

The regulation of stablecoins is a hot topic from over a year now with the rise of stablecoins last year. The ‘algorithmic stablecoins’ which are not being backed by any asset at all are the most talked about in terms of legality.

 

In December last year, Basis, a stablecoin that raised more than $135 million was shut down after the Securities and Exchange Commission announced that it could not circumvent from being categorized as security.

 

She also told the crowd that people often try to hide the facts by labeling their things but the Securities and Exchange Commission looks beyond the showcased labels to understand what precisely they are upto. According to her, the SEC looks at the attributes of the cryptocurrencies such as the economic existence, the transactions etc. whether someone calls it a utility token, a stablecoin or any other coin. She also said that what crypto startups should be asking from the SEC is not forgiveness but authorization or consent.

#Explained

ICO vs STO, Are Security Token Offerings Different?

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STOs are becoming more and more convincing for investors and companies to raise capital.  Securities can offer many financial rights to investors.

The initial coin offering ( ICO ) is the first, most frequently used and fastest way to finance a blockchain project without intermediary, at least in 2017 – 2018.
The STO can be compared to the IPO, where the tokens are treated as real securities.
With the increasing number of fraudsters in the ICO universe, as well as the strong desire of governments to control Israel’s deregulated crowdfunding campaigns, regulators such as Securities and Exchange Committee ( SEC ) were unhappy, and they could not leave aside.

Such smart contracts also allow for the production of nonfungible tokens ( such as ICO tokens ) or non – fungible tokens ( such as cryptocurrencies ) on the durable, battle-tested blockchain of Ethereum.
In contrast to ICOs, STO tokens are usually supported by a known element, such as assets, shares, income or profits.
In addition to the high initial legal and compliance costs, the other major drawback of STO tokens is that large cryptocurrency exchanges such as Binance do not yet support them.

 

STOs are more transparent than ICOs

One result of the need for change is the increase in sales of collateral tokens ( STOs ), a more transparent investment vehicle.
Primarily, a security sign represents an electronically packaged interest or a share in a private interest or company – and can be extended to assets such as real estate, trusts, LLC, fine arts, etc.
Often, securities are given the right to a form of equity or ownership of a particular asset, whether fractional or whole and to expect profits through income, dividends or favorable price movements.
Companies can offer digital security tokens for a variety of assets that are otherwise illiquid, while investors can buy lower – risk securities in their preferred investments.

 

Utility Tokens and Security Tokens

In contrast to Utility tokens, Security tokens can be backed by corporate assets such as shares, voting rights or other rights to a real asset.
For example, if company X, which turns out to be a very successful mutual fund, moves 5 million dollars into a free chain STO, the resulting hype about buying and investing would be unprecedented.
Not only is it illegal to manipulate the market, but it also discourages institutional investors, such as Company X, from investing in such projects, because their total investment will be readily visible to the public.

Companies that register an STO will have to submit documents that are publicly available through the SEC EDGAR database.
Sto’s security tokens are based on Alternative Trading Systems ( ATS ) with intermediaries registered with the SEC and monitored by the FINRA.
More and more people will understand what the stock of the blockchain is, and security tokens will become an integral part of the global financial system.

Elsewhere in Europe, the financial industry, traditionally focused on fiat, is beginning to support cryptocurrencies as securities.
Regulators, the financial industry and many cryptocurrencies are slowly developing a common understanding of what blockchain security should look like.

 

STOs are more secure for Investors

STO has achieved this level of security, which IPO has, as well as the relative simplicity and accessibility that is inherent to ICO.
To have a convenient opportunity to view the list of all current ICOs in one place, particular aggregator sites have been created, called ICO trackers.
The following data is analyzed to create an estimate of this parameter: advertising of the development team, White Paper, the availability of a work test product, the reputation of consultants and partners, etc.
Detailed information on ICO projects can be found on larger sites, and some services can easily publish WP by linking to the official project source.
There are a lot of fraudsters on the ICO market, which you can find on specialized services – ICO trackers.
In short, and simply put, the definition of a hard fork is a significant upgrade of an existing cryptocurrency in which a new currency is created.

 

STOs offer more rights to the Investors

In theory, the symbolic economy can improve network effects by rewarding user involvement and even better governance by giving the most active users a more significant influence on future protocol decisions.
Some traders earn their living by doing so with the public market share, and the behavior of investing is one of the driving forces behind the current cryptocurrency market.
Stos are usually granted an exemption called D 506 ( c ), which is a public offering of securities to accredited investors ( each person with net worth 1 million dollars plus or annual income of 200, 000 or more dollars over the last two years – 300, 00.

STOs are becoming more and more convincing for investors and companies to raise capital.
Securities can offer many financial rights to investors, including shares, dividends, income shares, profit shares, voting rights, and other financial instruments.

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#SEC

Spanked by the SEC: Paragon and Airfox ICO

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The Securities and Exchange Commission has ordered penalties of $250,000 each against two Initial Coin Offerings: Paragon and Airfox.

SEC Orders against Paragon and Airfox

The Securities and Exchange Commission has ordered penalties against two Initial Coin Offerings: Paragon and Airfox. According to SEC, both the companies failed to register their ICO tokens as securities under the securities and exchange act 1929. Thus both companies Paragon and Airfox (CarrierEQ) have reached out for settlement with the agency where each of the company have to pay $250,000 to the securities and exchange commission. Notably, all the investors of the initial coin offerings have got an opportunity for a refund.

 

Press Release by SEC

According to the press release published by Securities and Exchange Commission, the agency has imposed a fine of $250,000 against Paragon and Airfox which includes the amounts which will be used to compensate the investors in both Initial Coin Offerings which are being termed as Illegal Offerings. Also, the agency has ordered both the companies to register their respective tokens as securities under the securities exchange act 1934.

 

Steven Peikin, the Co-Director of Securities and Exchange Commission Enforcement believes that the following action against both these companies will help the agency to encourage the other United States based Initial Coin Offerings to register with the federal securities laws.

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#Exchange

Aftermath of EtherDelta Charges by SEC

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SEC’s swift action against the founder of EtherDelta does not appear to have had an immediate impact on cryptocurrency world.

SEC’s swift action against the founder of EtherDelta does not appear to have had an immediate impact on the crypto world.  As the non-fiat community awakens to the regulatory rap, crypto prices remained flat. With the sole exception of a few raised voices from Korean Bar Association on Thursday for the legalization of crypto activities and encourage mass adoption, there has not been much activism from the industry or user community in protest against the fine.

However, SEC’s enforcement moves do have a handful of lessons for the Decentralized exchange (DEX) community in particular.

 

Lessons Learnt from EtherDelta-SEC Confrontation – DEX should follow same rules

EtherDelta, the crypto token exchange has reached a settlement with the United States trade regulatory body Securities and Exchange Commission (SEC), following charges of operating the exchange without necessary approvals.  Zachary Coburn, the founder of the unregistered exchange, did not challenge SEC’s scrutiny and instead chose to pay penalties to the tune of $388,000, disgorgement as well as interests as part of the settlement.

Andrew Hinkes, New York University School of Law professor in his expert commentary of the deal, opines that EtherDelta operated as an exchange without the necessary legal endorsements from the council and the securities laws and implications and thus action and enforcement from SEC were but a question of time.

Thus the agreement arrived between EtherDelta and the SEC sets a precedent for new things to happen with respect to Decentralized Exchanges (DEXs).

 

DEX and SEC

The surprising part of the deal is that Coburn no longer works with EtherDelta, having quit the organization in 2017. However, since SEC was penalizing the organization and its executive members for the period of July 12, 2016, and December 17, 2017, Coburn is party to the settlement.

By penalizing the exchange, SEC has established the precedent that decentralized networks cannot be irresponsible or behave differently from centralizes server networks. Secondly, even if the business has ceased to operate or the owners have changed, SEC will enforce securities laws.

The penalty imposed is just a matter of routine and did not have any other penalties in terms of his participation in the markets. Experts believe by cooperating with the regulatory body, Coburn was able to win himself his favor, else it could well have led to his suspension or higher fines to be participating in the capital markets.

The third lesson is that the SEC wants the executives behind the actions of an organization are to set up the guidelines for such management leaders to work within the regulatory dimensions and not demand exceptions.

 

ICOs led to SEC aggressiveness

The year 2017 saw a proliferation of ICOs and tokens, especially in the US capital markets. Additionally, a plethora of Decentralized exchanges also began to set up a shot using, most commonly, assets which ran on the Ethereum network. These exchanges engaged in swapping of assets and thereby did not see the need for operating under a licensing system. Besides, they believed that being decentralized agencies they ruled themselves out of the centralized server-system framework regulated by SEC.

Thus, another lesson learned here is that the Ethereum platform – ERC20, when used cannot be considered as exempt by the exchanges from SEC obligations and compliance. Smart contract operations are also violating Exchange Act, states cyber law expert Hinkes. However, if Coburn and his group were alert and had kept out “certain tokens” their operations on ERC20 would not have been an issue states Hinkes.

 

Legal Labyrinth – the biggest Aftermath

Hinkes hints that the settlement between the likes of Coburn by the SEC now throws open the question of operations of organizations like EtherDelta. The question of unregistered securities sales and purchase is now open-ended in the USA, while overseas regulators are welcoming ICO and token use. The legal labyrinth remains the biggest aftermath post the legal settlement with Coburn.

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