Crowdfund Insider | | Dec 13, 2021
SEC Commissioners Hester Peirce and Elad Roisman have once again voiced their concern regarding SEC Chairman Gary Gensler’s regulator agenda – a list that was recently updated.
Last summer, Gensler published his regulatory agenda and now an update is available. When Gensler posted his initial goals, Commissioners Peirce and Roisman issued a statement criticizing the list of rules and regulations the Gensler Commission was seeking to address. Today, the two Commissioners are once again expressing their disappointment in Gensler’s agenda.
The two Commissioners have posted a statement labeled “Falling Further Back” calling Gensler’s agenda “ambitious in scope” but failing “to include any items intended to facilitate capital formation.”
“Instead, the agenda is brimming with plans to redo recently completed rules, add new regulatory obligations, and constrain investor choice,” chastised the two Commissioners.
At the very top of Gensler’s list (once again) are exempt securities offerings as well as a change to the definition of an accredited investor – a move that would most certainly aspire to limit access further to private securities.
To quote the statement but the Commissioners:
“One example is the proposal to alter the thresholds at which an issuer is required to register a class of securities with the Commission. In 2012, Congress enacted the bipartisan Jumpstart Our Business Startups (a.k.a., the JOBS Act), which, among other provisions aimed at improving capital access for newer companies, specifically raised these thresholds in order to allow companies greater flexibility in deciding whether and when to go public. This provision has been especially important for pre-IPO companies that use equity as part of their employee compensation arrangements and for startups in industries with high initial capital requirements. Lowering these thresholds may both contradict the express will of Congress and potentially undermine our mission to facilitate capital formation. A likely unintended consequence of lowering thresholds will be to limit the opportunity of employees, smaller investors, and other non-institutional investors to invest in promising businesses.”
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Republic | Janine Yorio | Dec 14, 2021
A multi trillion dollar universe of illiquid, privately held assets stands ready to be securitized on the blockchain. Millions in venture capital is riding on the premise. So why haven’t security tokens caught on yet?
Utility tokens are like chips in a casino. They can be used as currency within the casino for playing games, tipping dealers and sometimes buying drinks or hotel rooms. Holders of a casino’s chips do not own a stake in the casino, nor does it entitle the holder to any of the house’s winnings or profits. Security tokens, on the other hand, are like owning stock in the casino, shares in the company itself. When the house wins, you win. Security token holders own something that might pay off through profits or distributions. Utility tokens are used in an ecosystem. Security tokens give you ownership in that ecosystem.
In 2018, when many notable utility tokens nosedived in value, the crypto community rallied around security tokens and declared that their simplicity would be the salvation of the crypto economy. Some were even saying that security tokens would become crypto’s “killer app.” Venture capital poured into security token projects, lured by the prospect of bringing liquidity to private markets, especially real estate, which is the world’s largest asset class--and one where brilliant minds have struggled to bring true liquidity for decades.
That year, Founders Fund and Andreesen Horowitz led an unusually large ($28MM!) seed round into Harbor, a crypto startup promising to put ownership of real-world assets on the blockchain. The company’s founder declared that Harbor would do to the real estate market what email did to snail mail. Three years later, the real estate market has escaped any noticeable change. Harbor’s slow attempt to mainstream security tokens is indicative of what has happened across the entire security token industry: big promises, disappointing results. It’s easy to see why people might (wrongfully) conclude that security tokens are a bust.
In order for security tokens to achieve their full potential, they must fulfill their promise of liquidity. Liquidity requires two things: a regulated exchange and sufficient trading volume. So far, neither of these requirements has materialized.
Most attempted security token exchanges have floundered. In 2018, well-funded companies like Templum, tZero, Coinbase, Openfinance and Sharespost announced that they would list security tokens on their exchanges. Sharespost was particularly well positioned to do so because they were an existing broker dealer with ATS registration. Three years later, the only exchange which has succeeded even modestly is tZero. However, even tZero, a passion project of publicly-traded firm Overstock.com, only offers two security tokens for public trading, one of which is an affiliate of its parent company. Openfinance, although still in existence, offers securities with a combined market cap of only around $50 million–a mere drop in the bucket.
At the moment, no dominant platform for trading security tokens exists. Furthermore, the complex compliance issues have largely discouraged new entrants. But there is hope. Since security tokens are programmable, compliance can be baked right into the token which should reduce compliance hassles. Compliant protocols like Polymath and Harbor have figured out how to collaborate with exchanges to address these issues.
Trading volume has also been thin, but the expectation that digital securities would trade with the volume and frequency of public equities or cryptocurrencies was flawed from the start. Digital securities represent private investments, an asset class that has always traded infrequently. Adding blockchain does not necessarily incentivize owners to trade them any more frequently.
Exchanges don’t exist and trading volume is thin. Where is the silver lining in all of this?
Security tokens are subject to greater regulatory scrutiny than utility tokens (like Bitcoin or Ethereum) from the US Securities & Exchange Commission (the “SEC”). Security tokens require full SEC approval to be sold in public offerings to non-accredited investors or traded on secondary exchanges. This is one of the many reasons their growth and adoption has been more modest.
The SEC (once considered an insurmountable obstacle to compliant token offerings) is finally starting to qualify offerings. Nothing pours fuel on a financial product’s fire quite like transparency and regulatory clarity, and it’s happening now.
In July 2019, the SEC qualified the first Regulation A token offering (a $23MM offering for Blockstack) setting precedent for the sale of tokens that are immediately tradable to both accredited and non-accredited investors. They also provided clarity around secondary sales.
In July 2020, Arca Labs began trading its digital security token, the ArCoin, which is registered with the SEC and represents shares in Arca’s U.S. Treasury Fund.
In September 2020, the SEC finally registered an $85 million security token offering from INX, a foreign crypto trading company. This became the first ever security token IPO qualified by the SEC, marking a major milestone.
In April 2021, the SEC qualified a Reg A+ token offering for Exodus, marking the first digital asset security which conferred equity in a US-based issuing company. Exodus subsequently raised $75 million from 6,800 individual investors.
Security tokens aren’t strictly a US phenomenon. In May 2021, a Singapore-based bank issued its first security token offering, a $11.3MM digital bond that pays a 0.6% annual coupon.
These movements may appear relatively small, but they mark an important transition for the crypto industry, as it evolves from the Wild West of the dark web to navigating the daunting obstacle course of regulatory scrutiny. All of these changes pave the way for massive mainstream adoption.
Given all of these positive developments, I have become very bullish on security tokens, but let me be very clear: my enthusiasm has absolutely nothing to do with fractionalization or liquidity. Both of those things are already widely available in the stock market. Tokenization adds very little on either of these fronts.
Instead, let’s be brutally honest about what people love about crypto. (Hint: it’s not their stability or their SEC compliance.) Crypto’s popularity is entirely attributable to its insane volatility--so volatile that 20%+ intraday swings are not atypical. Previous attempts to tokenize stable, income-generating assets have failed to acknowledge this fundamental truth. If the carrot of fractionalization alone were seductive enough to encourage people to invest, then REITs would be as popular as Shiba Inu coin. But they’re not.
The problem with early security tokens like Aspen Coin or the RealT coins is that they seem like they make sense but they offer absolutely zero potential for the kinds of meteoric returns that Dogecoin fans love. Security token advocates point to the stability of underlying assets as an important attribute and one that should breed a strong affinity. But stability contradicts the very ethos of crypto. If security tokens are ever going to induce full-fledged crypto mania, it will be because their issuers finally embrace their volatility rather than try to avoid it.
The perfect security token is one that is secured by real assets--but where the underlying assets themselves offer the potential payout for a moonshot return.
I believe that security token alchemy will occur when an insightful issuer finally creates a SEC-qualified digital security token that has potential moonshot returns. Why?
Combining the legitimacy of SEC qualification with the rocket fuel of crypto-style returns would be like the gateway drug for all the crypto-curious conservative investors who have dabbled in Bitcoin but are too timid to invest in the types of highly speculative utility tokens which might turn out to be completely worthless. A truly compliant crypto asset backed by actual, quantifiable and verifiable assets with the potential for exceedingly high returns would break the internet--and maybe Coinbase, too.
For investors attracted to the high returns but deterred by an investment backed by nothing more than a white paper and a promise of future utility, the allure of such a security token would be irresistible.
Republic Realm is a metaverse innovation and investment platform and among the largest owners of digital real estate NFTs in Decentraland, Sandbox and Axie Infinity and among the most active developers of in-metaverse content in Sandbox and Decentraland. Republic Realm is the creator of the Fantasy Islands master-planned community NFT project. Republic Realm is backed by strategic financial and crypto investors and Galaxy Interactive. Republic Realm is based in New York City, and is an affiliate of Republic.co, the alternative investment platform. For more information, visit www.republicrealm.com.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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IMF Blog | Tobias Adrian, Dong He, and Aditya Narain | Dec 9, 2021
Crypto assets and associated products and services have grown rapidly in recent years. Furthermore, interlinkages with the regulated financial system are rising. Policymakers struggle to monitor risks from this evolving sector, in which many activities are unregulated. In fact, we think these financial stability risks could soon become systemic in some countries.
Uncoordinated regulatory measures may facilitate potentially destabilizing capital flows.
While the nearly $2.5 trillion market capitalization indicates significant economic value of the underlying technological innovations such as the blockchain, it might also reflect froth in an environment of stretched valuations. Indeed, early reactions to the Omicron variant included a significant crypto selloff.
Determining valuation is not the only challenge in the crypto ecosystem: identification, monitoring, and management of risks defy regulators and firms. These include, for example, operational and financial integrity risks from crypto asset exchanges and wallets, investor protection, and inadequate reserves and inaccurate disclosure for some stablecoins. Moreover, in emerging markets and developing economies, the advent of crypto can accelerate what we have called “cryptoization”—when these assets replace domestic currency, and circumvent exchange restrictions and capital account management measures.
Such risks underscore why we now need comprehensive international standards that more fully address risks to the financial system from crypto assets, their associated ecosystem, and their related transactions, while allowing for an enabling environment for useful crypto asset products and applications.
The Financial Stability Board, in its coordinating role, should develop a global framework comprising standards for regulation of crypto assets. The objective should be to provide a comprehensive and coordinated approach to managing risks to financial stability and market conduct that can be consistently applied across jurisdictions, while minimizing the potential for regulatory arbitrage, or moving activity to jurisdictions with easier requirements.
Crypto’s cross-sector and cross-border remit limits the effectiveness of national approaches. Countries are taking very different strategies, and existing laws and regulations may not allow for national approaches that comprehensively cover all elements of these assets. Importantly, many crypto service providers operate across borders, making the task for supervision and enforcement more difficult. Uncoordinated regulatory measures may facilitate potentially destabilizing capital flows.
Standard-setting bodies responsible for different products and markets have provided varying levels of guidance. For example, the Financial Action Task Force has issued guidance for a risk-based approach to mitigating financial integrity risks from virtual assets and their service providers. Actions by other standard-setting bodies range from broad principles for some types of crypto assets to rules for mitigating exposure risks of regulated entities and setting up information exchange networks. While useful, these efforts aren’t sufficiently coordinated towards a global framework for managing the risks to financial and market integrity, financial stability, and consumer and investor protection.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Cato Institute | Dec 9, 2021
Cryptocurrency regulation sits at the intersection of multiple regulatory regimes: financial markets regulators and banking regulators, among many others, have asserted authority over certain aspects of crypto regulation, which has resulted in an overlapping and incomplete regulatory framework that has drawn criticism from both proponents and skeptics of crypto innovation.
So, how is cryptocurrency regulated? How should it be regulated? Who should regulate it? Cato’s Center for Monetary and Financial Alternatives is looking at these questions with a series that examines the roles of different regulators and considers what type of regulatory framework should be adopted to balance the risks and innovative potential of cryptocurrencies.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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ECB | Ulrich Bindseil, Fabio Panetta, Ignacio Terol | Dec 2, 2021
Even before their deployment in major economies, one of the concerns that has been voiced about central bank digital currency (CBDC) is that it might be too successful and lead to bank disintermediation, which could intensify further in the case of a banking crisis.
Some also argue that CBDC might crowd out private payment solutions beyond what would be desirable from the perspective of the comparative advantages of private and public sector money. This paper discusses success factors for CBDC and how to avoid the risk of crowding out.
After examining ways to prevent excessive use as a store of value, the study emphasises the importance of the functional scope of CBDC for the payment functions of money.
The paper also recalls the risks that use could be too low if functional scope, convenience or reachability are unattractive for users. Finding an adequate functional scope – neither too broad to crowd out private sector solutions, nor too narrow to be of limited use – is challenging in an industry with network effects, like payments.
The role of the incentives offered to private sector service providers involved in distributing, using and processing CBDC (banks, wallet providers, merchants, payment processors, acquirers, etc.) is discussed, including fees and compensation.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Crowdfund Insider | | De 8, 2021
Earlier today (December 8, 2021), the House Financial Services Committee held a hearing on digital assets. As was previously reported, the witnesses included top crypto executives and thus provided the opportunity for a unique discussion between House members and crypto entrepreneurs.
Chairwoman of the Committee, Representative Maxine Waters started her questioning with a critical question about Facebook/Meta and its Novi wallet, asking Paxos CEO Charles Cascarilla how Meta’s attempt to create a digital currency will not challenge the US dollar. Paxos said that Meta came to them because they have the most regulated product referencing its dollar-based stablecoin. Cascarilla noted that the pilot was quite limited in size (US and Guatemala) and suggested a discussion with Novi would reveal more information as to the company’s intent to expand the digital wallet.
Ranking Republican Patrick McHenry used his time to focus on the need to enable Fintech innovation in the US instead of chasing crypto startups to other, more welcoming jurisdictions. “Policymakers need to understand the nature of Web 3,” said McHenry. Bitfury Group CEO Brian Brooks explained that Web 3 enables users the ability to own the network, and this is what crypto assets represent.
Regarding prepared remarks, Alesia Jeanne Haas, CEO of Coinbase Inc., and CFO, Coinbase Global Inc, said that crypto is opening up a new financial system. “[The] foundational benefit of crypto is that it allows for innovation of new financial and non-financial applications, like non-fungible art tokens (NFTs), that are controlled by the individual.”
Sam Bankman-Fried, co-founder and CEO of FTX, one of the top crypto exchanges in the world, shared that FTX is designed to empower the individual investor and consumer:
“…because we offer products that are easily accessible and inexpensive, so investors and consumers can make simplified choices to achieve their economic goals. Easy access to financial products all in one place, in many cases on a mobile phone, without multiple gatekeepers assessing rents and posing risks to the investor along the way, is how the digital asset ecosystem is impacting the real everyday lives of those involved, and helping them achieve economic security along the journey.”
He said that a supportive and accommodating policy environment will “only empower the individual investor even further.” Bankman-Fried added that he fully supports a regulatory framework that protects investors and ensures an orderly market to “maintain US leadership.”
For most of the hearing, many members were supportive of digital assets in general, with many advocating for clear-cut rules that do not exist today.
The platforms shared how they currently adhere to strict AML/KYC rules while working closely with authorities to uncover or halt any nefarious activity. Blockchain is a public ledger making it easy to trace transactions that may be illicit in nature – unlike cash.
Brooks said that the US needs to compete on features and utility, globally.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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BankingDive | Robin Bradley | Dec 7, 2021
DeFi is ripe for regulation before the ecosystem becomes more popular, the Basel-based organization says in its quarterly report.“The point raised in the special feature is that there’s a limit to how far you can run a whole financial system purely based on those automated transactions,”
CoinDesk reports Hyun Song Shin, economic adviser and head of research at BIS, said during a press briefing.
The Basel, Switzerland-based organization's paper refers to DeFi as “the financial applications run by smart contracts on a blockchain,” which is typically a permission-less chain. DeFi aims to cut down on the rents accrued by intermediaries in traditional finance.
The report argues that central premise of boosting efficiency by reducing private intermediation has yet to be realized, and the high degree of anonymity afforded by DeFi along with limitations in anti-money laundering and know-your-customer (KYC) provisions, expose the sector to illegal activities and market manipulation.
BIS makes the case that the “De” in “DeFi” is just an illusion, since all DeFi platforms include central governance frameworks. For example, governance tokens are often integrated into DeFi projects to afford voting power to individuals. Those holding governance tokens can vote to influence the project in various ways, and become part of a body known as a decentralized autonomous organization (DAO).
It is this element of centralization that may give policymakers the ability to regulate the DeFi ecosystem. The report mentions that, in Wyoming, DAOs have been allowed to register as limited liability companies since mid-2021. Such a legal designation gives policymakers new tools to regulate the ecosystem.
BIS is an international institution owned by 63 central banks that represent countries comprising roughly 95% of the world’s gross domestic product. BIS operates as both a global forum and a bank for central banks.
Recently, it partnered with the Federal Reserve Bank of New York to launch a new innovation center, which will support research on central bank digital currencies.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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