Category Archives: Blockchain, Crypto, Digital Assets Regulations
Cathie Wood’s Ark grants itself power to buy Canadian Bitcoin ETFs
Financial Post | Sam Potter and Elaine Chen | Sep 13, 2021
Money manager seeking fresh ways to bet on digital assets
Cathie Wood’s Ark Investment Management is allowing one of its funds to invest in Canadian Bitcoin ETFs as the money manager seeks fresh ways to bet on digital assets.
In a late-Friday filing for the US$5.7-billion ARK Next Generation Internet ETF (ticker ARKW), the firm tweaked the fund’s prospectus to include reference to holding exposure to cryptocurrencies via “exchange-traded funds domiciled in Canada.”
The move comes after the US$1.3-billion Amplify Transformational Data Sharing ETF (BLOK), a blockchain-focused product, was last week shown to have a tiny stake in three Canadian Bitcoin ETFs.
See: Bitcoin ETF option gives investors a safer and liquid way to get exposure
Investors and issuers in the US$6.8 trillion U.S. ETF market are still waiting for regulators to approve exchange-traded products investing in cryptocurrency. While Canada and Europe have raced ahead, a huge backlog of applications has built up with the Securities and Exchange Commission. Ark is among those in line, having teamed up with Switzerland-based 21Shares AG to file plans for a fund in the U.S.
ARKW already boasts some Bitcoin exposure — about 5.5 per cent of the fund is invested in the Grayscale Bitcoin Trust (GBTC), according to data compiled by Bloomberg.
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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Legal experts say “This Is It” moment for XRP in Ripple lawsuit,
Finance Feeds | Rick Steves | Sep 10, 2021
The SEC has filed a letter in opposition to Ripple’s motion to compel the agency to provide clear answers to its interrogatories.
The plaintiff argued the defendants have waited until the end of fact discovery, more than seven weeks after receiving the SEC’s
first interrogatory responses, to inform the SEC they considered the responses deficient.
The SEC claims it has supplemented five of the responses at issue, met and conferred, and asked Defendants to identify what specific information they still required. “Defendants refused, and instead filed the Motion less than three hours before fact discovery closed.
See: SEC v. Ripple Legal Weeds: SEC caught erasing documents relevant to XRP lawsuit
The agency further added it has substantively answered the interrogatories at issue as required by the Federal Rules of Civil Procedure and the Court’s recent guidance that a party “need not catalog every fact or piece of evidence so long as it identifies representative samples and provides…meaningful disclosure.”
“Defendants’ argument here boils down to a complaint that they do not like the answers they received to the interrogatories at issue, in large part because the SEC’s and Defendants’ interpretation of the applicable law differs.”
“But the SEC is not required to answer the interrogatories in a way that adopts Defendants’ incorrect reading of the law. The parties’ dispute as to the correct application of the controlling legal standards should be resolved by Judge Torres at summary judgment, not on a motion to compel interrogatory responses”, the plaintiff wrote in the letter.
Ripple’s interrogatories are aimed at identifying the SEC’s theory of how the Howey Test applies to virtually all of Defendants’ transactions in XRP over the last 8 years.
The creator of the XRP ledger filed its motion to compel slightly after the extensively covered telephone conference which resulted in the Judge being unhappy with the SEC’s arguments and ordering an in-camera review of the documents of which the SEC claims privilege.
See: Coinbase Threat Shows SEC Means Business
In the motion, Ripple stated evasive responses “must be treated as a failure to disclose, answer, or respond”, putting further pressure on the SEC which has been quite evasive in regard to its deliberative process. The motion also shows how the plaintiff has evaded Ripple’s inquiries.
Attorneys recommend SEC provide clear answers under oath for its own sake
Attorneys Jeremy and Thien-Vu Hogan have recently provided an analysis on this new topic: Ripple’s motion to compel answers to interrogatories.
The XRP-friendly stated how important is the pleading, arguing that the SEC will be writing under oath, which will have formal effect and cannot be dismissed as Hinman’s 2018 speech was.
See: Decentralized Finance—Risks, Regulation, and the Road Ahead
“In other words, these answers can be introduced into evidence, quoted at trial, used during closing statement, etc. just like the SEC was on the stand with it’s right hand up in the air.”
“What we can see here in Ripple’s motion to compel answers or better answers to its Interrogatories is the SEC lawyers really struggle to lay out the entirety of its case with any specificity”, said Mr. Hogan in a video.
“So, putting aside whether the SEC has proven or can prove its case with these facts, the question for this motion becomes – is that a good enough answer?”
Mr. Hogan asked, leaving legal expert Thien-Vu Hogan to provide the answer.
“Not specific enough”, Ms. Hogan stated. “I mean, at one point in answering Interrogatory #8, the SEC provides a link to evidence and it’s just a link to Twitter in general. When I clicked on that piece of evidence, I saw a picture of my face – that’s some ugly evidence”.
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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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Coinbase Threat Shows SEC Means Business
Yahoo Finance | | Sep 5, 2021
(Bloomberg) -- U.S. Securities and Exchange Commission Chair Gary Gensler just put the cryptocurrency industry on notice of how far the regulator will to go to tame a market he’s labeled the wild west of finance.
In threatening to sue Coinbase Global Inc. if the exchange lets customers earn interest on their digital tokens, the SEC sent a warning to other firms already offering similar products or contemplating doing so. The move is the clearest sign yet that, under Gensler, the regulator will aggressively use its powers to thwart products it’s uncomfortable with -- even before they launch.
Privately, ex-SEC officials said they were shocked by the agency’s posture, which Coinbase disclosed Tuesday in a blog post. The former officials said the SEC typically waits for firms to start selling investments before announcing possible sanctions, indicating the agency has found a forceful way to shut down cutting-edge crypto offerings it fears are putting consumers at risk. Coinbase slid 3.2% to $258.20 in New York trading on news of the SEC’s pending enforcement action.
The SEC is being aggressive for the first time in a long time
“The SEC is being aggressive for the first time in a long time,” said James Cox, a professor at Duke University School of Law. “The SEC has been putting a lot of muscle into cryptocurrency. It’s a big, fast-growing market and a fertile area for abuses.”
See: Will Gary Gensler at SEC be Good for Crypto?
SEC officials declined to comment.
Coinbase’s tussle with the SEC became public when Paul Grewal, the company’s chief legal officer, said the SEC determined that Lend involved “a security, but wouldn’t say who or how they’d reached that conclusion.” Grewal added that the agency told Coinbase “that if we launch Lend they intend to sue,” prompting the company to shelve the product until at least October.
Coinbase Chief Executive Officer Brian Armstrong later tweeted that the SEC was engaging in “really sketchy behavior.”
The crypto exchange won support from at least one long-time SEC adversary: Billionaire entrepreneur Mark Cuban. In a series of tweets, he urged Coinbase to fight back to prevent the agency from winning a legal ruling that allows it to assert more authority over tokens and DeFi. Cuban famously prevailed against the SEC in 2013 after it accused him of insider trading.
See: Decentralized Finance—Risks, Regulation, and the Road Ahead
Mark Cuban. In a series of tweets, he urged Coinbase to fight back to prevent the agency from winning a legal ruling that allows it to assert more authority over tokens and DeFi
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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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FCA Chair Charles Randall Discusses Crypto, Stablecoins and Digital Asset Regulation
Crowdfund Insider | | Sep 6, 2021
In a speech delivered at the Cambridge International Symposium on Economic Crime, FCA and PSR Chair Charles Randall discussed some hot topics in the financial services sector – fraud and scams. More specifically, crypto scams and the regulation of digital assets or tokens.
See: Moody’s says Crypto regulation a plus for banks, fintechs
Currently, the UK Financial Conduct Authority (FCA) has a limited role in the regulation of crypto assets as well as the platforms that facilitate trading. But this is something that is expected to change in the future.
Regarding crypto scams, Randall started with Kim Kardashian, and when she asked her 250 million followers to speculate on a crypto-asset claiming this may have been the “financial promotion with the single biggest audience reach in history.”
Randall worries that many crypto assets are little more than ephemera:
“There are no assets or real world cashflows underpinning the price of speculative digital tokens, even the better-known ones like Bitcoin, and many cannot even boast a scarcity value. These tokens have only been around for a few years, so we haven’t seen what will happen over a full financial cycle. We simply don’t know when or how this story will end, but – as with any new speculation – it may not end well.”
Meanwhile, a growing number of UK individuals hold digital assets and Randall advises these investors to be prepared to “lose all of your money.”
So should the FCA gain greater authority in the oversight of digital assets as well as marketplaces that enable transactions?
See: FCA Speech: Levelling the playing field – innovation in the service of consumers and the market
Randall says that “an effective system of regulation of digital tokens has to allow the more promising use cases for the innovative technology that underlies the tokens to flourish – especially the potential to make payments and financial infrastructures more efficient and accessible.” He believes in balanced regulation. Stablecoins are mentioned as an area of interest as this can remove friction (and cost) in the transfer of value.
“The Bank of England is considering the risks that stablecoins could pose to the financial system and monetary policy, but we saw with the UK operations of Wirecard that a player in payments does not have to be systemically important to cause significant consumer distress. So, any stablecoin business we may come to regulate, even if it is not systemic, will need to assure that end users would be able to easily exchange them, access them and use them to make payments safely and securely, with the same level of protection we expect from other types of payment instruments.”
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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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Decentralized Finance—Risks, Regulation, and the Road Ahead
JDSupra | King & Spalding | Sep 1, 2021
Even those who are most suspicious of the rise of cryptocurrency will likely admit that the underlying blockchain technology and its potential uses are exciting. One use of this technology, decentralized finance, or DeFi, is on the cusp of major growth. Regulators are aware of this growth and are moving to act accordingly. As a possible preview of the coming regulatory efforts, this past spring Treasury Secretary Janet Yellen urged regulators to accelerate their establishment of a regulatory framework for stablecoins, a rapidly growing class of digital currencies which, among other things, can be used on DeFi platforms to temper pricing volatility.1
See: Inside Jack Dorsey’s Next Big Bet on Bitcoin, DeFi
Since Secretary Yellen’s comments, Securities and Exchange Commission Chair Gary Gensler has made it clear that the regulation of DeFi platforms and stablecoins is on the SEC’s agenda.2 Earlier this month, he wrote to Senator Elizabeth Warren that both should be among Congress’ legislative priorities, adding that “[r]egulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending.”3 The SEC also brought its first enforcement case against a DeFi platform this month.4
DeFi Overview
DeFi describes blockchain-based alternative finance systems. DeFi platforms enable users to engage in traditional financial transactions like lending and borrowing through direct peer-to-peer exchanges, eliminating the role of traditional financial intermediaries by directly mediating the transfer of value. Transactions are settled on a public blockchain, rather than through a bank or other central institution. DeFi services use a non-custodial design, meaning assets issued or managed on DeFi platforms theoretically cannot be moved or expropriated unilaterally by parties other than the account owners.5 The use of open-source code—meaning code designed to be publicly accessible—allows participants to view and verify protocols directly as well as create derivative or competitive services.6 The composability7 of DeFi’s programmatic components allows financial instruments and services to incorporate multiple DeFi services and protocols, which distinguishes DeFi from private services or standalone digital assets.8
To effectuate transactions, DeFi uses open protocols9 and decentralized applications, or DApps.10 These protocols and DApps are powered by smart contracts—programs that automatically run when certain conditions are met, which are generally built on existing blockchains such as Ethereum.11 Smart contracts replace the intermediary role of centralized financial institutions with self-executing lines of code built into a blockchain.12
See: The Intersection of Ecommerce and NFTs: How NFT Technology is Changing DeFi
DeFi has experienced fast-paced growth since mid-2020. As of August 2021, the “total value locked” in DeFi sits around $75 billion.13 This value represents the amount of assets that are currently being staked across all DeFi protocols (i.e., pledged, loaned, or otherwise provided to the network to fund DeFi transactions). And even that figure may only be a fraction of its future potential.14
DeFi Risks
Despite DeFi’s rapid growth, its open-source ecosystem with the potential to democratize banking and finance, and its potential efficiencies, there are significant risks for industry participants to consider. These can be categorized into three buckets: technological risk, asset risk, and compliance/legal risk.
Technological Risk
Many DeFi protocols are powered by Ethereum, including nine of the largest DeFi projects.15 The Ethereum public blockchain infrastructure is far from infallible: increased customer adoptions of DeFi has led to a corresponding increase in attacks, bugs, and network congestion. These can lead to high network transaction fees, failed transactions, and liquidation issues. In some cases, extreme network congestion has led DeFi apps to stop functioning altogether. In addition to scalability challenges, DeFi platforms—like other forms of financial services operations—also face major cybersecurity threats.
See: CipherTrace August 2021 Crypto Crime Report: Crypto Fraud Dips as DeFi Hacks Grow
Many of the major DeFi “hacks” have been so-called “flash loan attacks”21 that sometimes take advantage of temporary defects in price feeds.22 Other examples have seen attackers exploit bugs or flaws within a protocol code.23 And beyond hackers, investors risk being targeted by exit scams, such as “rug pulls.” DeFi rug pulls are a new form of exit scam where a developer abandons a project and leaves with the funds.25
Asset Risk
DeFi applications are often built on the Ethereum blockchain, and the collateral pledged in DeFi transactions is typically cryptocurrency. Given the volatility of digital assets, it is possible for the value of that collateral to decline sharply, causing associated liquidity risks. This, in turn, can fuel a broader sell-off, and this uncertainty and instability can lead to catastrophic “bank runs” that send token values plummeting. Some individuals have sought to use stablecoins, which are backed by an asset (often fiat currency), to minimize this risk.
Compliance Risk
Most of the services in the space are software programs that automate financial transactions and replace the traditional role of the bank as an intermediary. This creates several risks and results in an uncertain regulatory environment. The lack of intermediaries, the anonymity of peer-to-peer transactions, and the global reach of DeFi present potentially amplified compliance risks for participants in the space. In the absence of clear, direct guidance from regulatory agencies, DeFi platforms face potentially vast and confusing compliance and legal obligations. Their operations can implicate a host of considerations, ranging from anti-money laundering to consumer protection.
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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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A Regulated Stablecoin Means Having a Regulator
Paxos | Dan Burstein | Jul 21, 2021
Dan Burstein is the General Counsel and Chief Compliance Officer of Paxos
I have been reading with a combination of disbelief and exasperation the recent claims by Circle that “USDC has become the world’s most trusted and well-regulated dollar digital currency,” as well as claims by Tether that “Tether is registered and regulated.” Neither USDC nor Tether is a regulated digital asset, for the simple reason that neither token has a regulator. In fact, neither USDC nor Tether tokens are “stablecoins” in anything other than name. These tokens are backed by illiquid and risky debt obligations – a critical weakness that no prudential regulator would allow to exist as this creates undue risk for their customers.
This is the key issue. Even if USDC or Tether adjusted their reserving practices so that their tokens were to actually become stablecoins (legitimately backed, 1:1, by US dollar or equivalents), rather than just in name, that should still be of grave concern to customers, regulators and public interest groups. As we have all seen time and again, proper regulation of financial services firms – which must include comprehensive oversight of the products and services offered by those firms – is the only way to protect clients and customers. What does that mean tangibly? There is direct oversight of client protections, resolution planning if there is a failure, privacy protections, consistent reserving practices plus audits and exams to verify this. In other words, even if USDC or Tether decided to now fully back their tokens with dollars, there would be nothing to prevent them from changing those practices back at will.
See: A Visual Explanation of Algorithmic Stablecoins
As a former financial regulator, and through my role at Paxos Trust Company, I have participated in the hard work of getting actual regulated stablecoins approved by an actual regulator, subject to the actual limitations that being regulated puts on a token. So I know what it means for a digital asset to be regulated; it means that a prudential regulator imposes safety and soundness requirements on the reserves backing the asset. As this ecosystem rapidly expands, it’s important to clarify what regulation is and what it is not.
This is deeply important as the crypto industry generally and specifically stablecoins shifts from early adopter instruments to mainstream consumer payments for goods and services. This shift has the potential to change the lives of everyone in the world, particularly those without ready access to the financial system — unfortunately, still billions of people today. Transparency in operations is crucial and should be required, but in itself is not enough. Trustworthiness and regulation are instrumental to realizing the enormous potential of stablecoins in the long-term.
REGULATED STABLECOINS
As of today, there are exactly three regulated dollar-backed stablecoins in the world: Paxos Standard (“PAX”) and Binance Dollar (“BUSD”), both issued by Paxos Trust Company, and the Gemini Dollar (“GUSD”), issued by Gemini Trust Company. Paxos and Gemini are both Trust companies regulated by the New York State Department of Financial Services (“NYDFS”).
Read: Stablecoins: What’s old is new again – speech by Christina Segal-Knowles
Trusts are required to have their products and services approved and supervised by NYDFS. PAX, BUSD and GUSD are expressly approved by the NYDFS and supervised by the regulator on an ongoing basis. This means:
- The value of each stablecoin token is tied directly to the value of the US dollar, and the amount of “reserve” dollars equal or exceed the number of stablecoins outstanding.
- Regulators are overseeing the establishment and maintenance of reserves backing the stablecoins.
- Reserves may only be held in the safest forms, such as FDIC-insured bank accounts and in short-term maturity US Treasury instruments.
- Reserves are fully segregated from corporate assets, specifically for the benefit of token holders, and are held bankruptcy remote pursuant to the New York Banking Law.
Regulatory oversight is important because it assures stablecoin users that the dollars underlying their stablecoins are secure and will be immediately available when they want them. The NYDFS ensures the Trust companies and their individual tokens are following its strict rules at all times. Additionally, NYDFS regulatory oversight meets the ten high-level recommendations for stablecoins set forth by the Financial Stability Board in an important report issued last year for the G20.
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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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SEC Inks Deal With Blockchain Analytics Firm AnChain.AI to Monitor DeFi Transactions
The Daily Hodl | Staff | Aug 28, 2021
The U.S. Securities and Exchange Commission (SEC) has inked a new deal with a blockchain analytics firm to help monitor and regulate the decentralized finance (DeFi) industry.
The San Jose-based analytics firm AnChain.AI announced the partnership on Twitter on Friday.
AnChain.AI CEO and co-founder Victor Fang tells Forbes that his firm is providing the SEC with the technology to analyze and trace smart contracts.
“The SEC is very keen on understanding what is happening in the world of smart contract-based digital assets.”
More regulation coming: SEC Chairman signals stablecoins and other tokens could fall under its rules on security-based swaps
Forbes also reports that the initial value of the contract is $125,000, with five separate one-year $125,000 option years.
The move comes after SEC Chairman Gary Gensler issued a warning on Fox Business earlier this month about the potential risks associated with the DeFi sector.
“We focus on investor protection. We’re neutral about technology, Bitcoin, and the other crypto tokens … and their innovative technologies. But at the same time, we’re not neutral about investor protection. So if somebody is in a project that’s offering a security, they should come in, they should register. These so-called decentralized finance platforms actually have a lot of centralization. There is a group of entrepreneurs that are running these platforms and they should come in and work with us and get registered.”
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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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