Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Category Archives: Regtech, Compliance, Governance
EU Report: Crypto Outside EU & Impacts on the Union
Crypto Regulation | Sep 28, 2023
Image: Unsplash/Charles Forerunner
EU's MiCA framework sets a new standard in crypto regulation, as the UK and US navigate their unique challenges and the global community calls for coordinated oversight.
The European Union, with its groundbreaking MiCA framework has set a precedent. Meanwhile, the UK and the US are carving their unique paths. Drawing insights from a recent EU report, this article provides an update of the regulatory landscape across these jurisdictions, highlighting the challenges, opportunities, and global implications of their respective approaches to crypto-assets and stablecoins.
EU's Regulatory Approach to Crypto-Assets
In 2023, the European Union introduced the innovative Markets in Crypto-assets (MiCA) framework, a comprehensive regulatory measure designed to oversee the burgeoning crypto-asset markets. The primary focus of MiCA is on stablecoins, ensuring that their value remains consistent with official currencies. This framework combines stringent transparency and governance measures with prudential rules similar to those applied to traditional financial institutions. The overarching aim of MiCA is to ensure better protection for citizens, maintain financial stability, and foster both innovation and financial inclusion in the crypto space.
UK and US
The United Kingdom has charted its own path in the crypto realm. With comprehensive crypto legislation in place, the UK is eyeing a status as a global 'crypto hub'. However, while the foundation is set, specific regulations and details have been deferred to national financial authorities.
See: The Federal Reserve Issues State Member Bank Guidance for ‘Dollar Tokens’ (Dollar-pegged Stablecoins)
The United States grapples with its own set of challenges. Crypto-assets in the US face a degree of legal ambiguity. They are primarily regulated as securities, leading to a cloud of uncertainty. This approach has sparked debates, with many advocating for more stringent and protective regulations.
Stablecoin Regulation by Country
| Jurisdiction | State of Regulation | |
|---|---|---|
| United States | Final legislation pending Draft bills introduced in Congress; no committee progress. | |
| United Kingdom | Final legislation pending Adopted in June 2023. | |
| Australia | Process initiated/plans communicated | |
| Bahamas | Stablecoin regulation in place | |
| Canada | Final legislation pending | |
| Cayman Islands | Stablecoin regulation in place | |
| European Union | Stablecoin regulation in place MiCA adopted; to enter into force in 2024. | |
| China (mainland) | Prohibition/ban | |
| Gibraltar | Stablecoin regulation in place | |
| Hong Kong | Final legislation pending | |
| Japan | Stablecoin regulation in place | |
| Mauritius | Stablecoin regulation in place | |
| Qatar | Prohibition/ban | |
| Saudi Arabia | Prohibition/ban | |
| Singapore | Final legislation pending | |
| South Africa | Final legislation pending | |
| Switzerland | Stablecoin regulation in place | |
| United Arab Emirates | Final legislation pending |
Source: Bank for International Settlements, "Crypto, tokens and DeFi: navigating the regulatory landscape, May 2023."
Global Perspectives and the Road Ahead
Academics and global entities have raised the alarm about the potential of stablecoins to destabilize financial systems. In practical terms, these instability effects can manifest in various ways:
Individuals
- If stablecoins (pegged to traditional currencies or assets), fail to maintain their peg, individual investors could see a rapid devaluation of their holdings.
- In cases where stablecoin platforms face regulatory scrutiny or technical issues, might experience delays or restrictions in accessing their funds.
- Without transparent reporting, individuals might make investment decisions based on misleading information about the reserves backing a stablecoin.
See: Canadian Federal Regulators Issue Joint Statement on Crypto Assets | OSFI Publishes Digital Asset Roadmap
Organizations
- Businesses that rely on stablecoins for operations, such as payment processing or remittances, might face disruptions if the stablecoin they use becomes volatile.
- Companies associated with stablecoins that fail to maintain their peg or face regulatory issues might suffer reputational harm.
- Organizations might face higher costs to ensure they meet varying regulatory requirements across different jurisdictions.
Governments
- Widespread adoption of stablecoins might interfere with a country's ability to implement effective monetary policy.
- If a widely-used stablecoin collapses, it could trigger a crisis in the broader financial system, similar to a bank run.
- Governments might lose some control over their financial systems if stablecoins, especially those issued by private entities, become dominant.
The concerns about fragmented global crypto regulations further exacerbate these potential issues. Without a unified approach to regulation, stablecoins could be subject to regulatory arbitrage, where issuers move operations to countries with laxer regulations. This could lead to a race to the bottom, with countries diluting regulations to attract crypto businesses.
See: The Federal Reserve Issues State Member Bank Guidance for ‘Dollar Tokens’ (Dollar-pegged Stablecoins)
However, the silver lining, as noted in the report, is that tighter regulation, such as that implemented by the EU, can have positive effects on the crypto market. It can increase investor confidence, reduce the chances of fraudulent schemes, and ensure that stablecoin issuers maintain adequate reserves.
While the EU's actions are commendable, the global nature of crypto-assets means that international coordination is crucial. Without a harmonized approach, the benefits of individual regions' regulations might be limited, underscoring the need for global cooperation to ensure the stability and integrity of the crypto market.
Download the 11 page PDF report --> here
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, artificial intelligence, 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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OSFI’s Evolving Focus on Integrity & Security
Regulatory Insights | Sep 26, 2023
Image: Unsplash/Brett Jordan
OSFI Superintendent Peter Routledge recently delivered a keynote speech at the Global Risk Institute Annual Summit, highlighting the organization's evolving approach to risk management, particularly in the areas of integrity and security.
Evolving Mandate
- Historically, OSFI's primary focus has been on prudential, financial risks, especially post the 2008 global financial crisis. This included aspects like leverage ratios, reserve capital, and liquidity.
- However, the growing prevalence of non-financial risks, such as those arising from climate change, digitalization, institutional culture, and geopolitical risks, has necessitated a broader approach.
See: OSFI and GRI report: AI in Finance Needs Safeguards, Explainability Key For Trust
- OSFI's mandate has recently undergone changes, emphasizing the importance of integrity and security in promoting confidence in Canada's financial system.
Non-Financial Risks A Growing Concern
- While financial risks remain a significant concern, non-financial risks, if unaddressed, can manifest as prudential risks.
- Risks like climate change, digitalization, and institutional culture, although primarily non-financial, can have substantial prudential impacts.
- Geopolitical risks are becoming more prominent and can expose Canadian financial institutions to vulnerabilities.
Addressing Threats to Integrity and Security
- The Government of Canada modified OSFI's mandate in June, emphasizing the supervision of federally regulated financial institutions (FRFIs) to ensure they have adequate policies against threats to their integrity or security, including foreign interference.
- Failures in integrity can lead to financial risks. Integrity is demonstrated through actions consistent with ethical standards, regulations, and the law.
- Security, defined as protection from threats to physical premises, technology assets, data, and information, is crucial for operational resilience.
Implications of Foreign Interference
- While Canadian banks are generally resilient, they are not immune to threats from potential hostile actors.
- Foreign interference can manifest in various ways, including cybersecurity threats, illicit financial activities, and vulnerabilities in ownership and control of financial institutions.
- OSFI emphasizes early action to address risks and expects financial institutions to respond immediately to suspicions of undue influence or malicious activity.
Future Directions
- OSFI plans to release draft guidelines on its approach to integrity and security by mid-October, with final guidance expected in the new year.
See: Guide: How to spot potential money laundering
- The organization is also building its capability to measure foreign interference risk in collaboration with federal government partners.
- OSFI's updated Supervisory Framework will consider how to supervise these new risks.
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, artificial intelligence, 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 Intensifies Probe of Wall Street’s Use of Messaging Apps
Regulatory Insights | Sep 25, 2023
Image: Unsplash/Matam Jaswanth
The U.S. Securities and Exchange Commission (SEC) has intensified its investigation into Wall Street's use of private messaging applications, including popular platforms like WhatsApp and Signal. This move has raised eyebrows in the financial sector, and here's a breakdown of the situation.
The digital age has brought about a plethora of communication tools, with messaging apps like WhatsApp taking center stage. However, the convenience they offer has also led to regulatory concerns, especially within the financial sector.
A Hefty Price for Non-Compliance in the U.S.
Recently, the SEC fined 11 brokerage firms and investment advisers for failing to monitor and preserve employees' messages on these platforms. Major financial institutions like Wells Fargo, BNP Paribas, Société Générale, and Bank of Montreal faced the brunt of these penalties who agreed to pay a staggering $549 million in fines. The SEC's focus is on ensuring that all business communications are recorded, as mandated by their regulations and has recently required Wall Street banks to review the personal phones of top traders and executives to determine the frequency of using these platforms for business. This has all been part of a a two-year crackdown into potential breaches of record-keeping rules initially targeted broker dealers, netting regulators over $2 billion in fines.
What's New?
However, the scope of the investigation has now expanded to include investment advisers. The SEC has recently collected thousands of staff messages from over a dozen major investment companies. This marks a significant escalation in the investigation, as previously, companies were only asked to review these messages internally. Now, the SEC is directly scrutinizing these communications, potentially exposing companies and their executives to increased regulatory scrutiny. Prominent firms such as Carlyle Group, Apollo Global Management, KKR & Co, TPG, and Blackstone are among those under the SEC's lens. Additionally, some hedge funds, including Citadel, are also part of the probe.
See: The SEC Will Be Watching You…Every Text You Send
The financial industry has voiced concerns over the SEC's approach. In a letter led by the Managed Funds Association earlier this year, the industry highlighted the "invasive" nature of the SEC's requests and raised privacy issues. Jennifer Han, the MFA's executive vice president and chief counsel, emphasized the importance of due process and expressed concerns over the SEC's unilateral expansion of rules through enforcement actions.
Is This Happening in Other Jurisdictions?
The UK's Prudential Regulation Authority (PRA) has been proactive in ensuring that financial firms adhere to stringent record-keeping standards, especially concerning electronic communications. A LeapXpert article sheds light on the PRA's stance on WhatsApp messaging. The regulatory body mandates companies to capture and save all business-related WhatsApp messages, monitor message exchanges for inappropriate behavior, and safeguard the confidentiality of these messages. The UK Financial Conduct Authority (FCA) has also been sending information requests to firms regarding the use of private messaging apps, emphasizing the need for auditable records.
Germany's Federal Financial Supervisory Authority (BaFin) is reportedly conducting an investigation similar to the SEC's, focusing on the use of ephemeral messaging platforms at financial institutions. BaFin aims to determine the extent to which bankers in Germany are using these platforms for business communications.
And in Canada?: According to a Blakes bulletin, the new Self Regulatory Organization (SRO), soon to be called the Canadian Investment Regulatory Organization (CIRO), requires Canadian Dealer Members to maintain complete and accurate records of client communications for at least seven years. This includes electronic communications. Dealer Members must also supervise their employees to ensure compliance with the rules. Unauthorized use of communication applications like WhatsApp, Signal, or text messages is contrary to the Standards of Conduct.
See: CSA releases 2022-2025 Business Plan focused on investor protection
While Canadian securities regulators are aware of the pervasive use of off-channel messaging apps, they have yet to impose large fines solely for unauthorized communications. However, some have started adding unauthorized communication contraventions to other allegations of wrongdoing. Canadian firms are advised to review their policies surrounding messaging applications and digital record-keeping proactively.
Conclusion
The world is becoming increasingly interconnected, and as technology evolves, so do the challenges it presents. Financial institutions, regulators, and messaging platforms must collaborate to strike a balance between convenience and compliance.
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, artificial intelligence, 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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The UK’s PRA Commitment to International Competitiveness and Growth
Regulatory Insights | Sep 21, 2023
Image: Vicky Saporta, Executive Director, Prudential Policy Directorate at the Bank of England
A recent speech by Victoria Saporta at the Bank of England conference sheds light on the Prudential Regulation Authority's (PRA) vision and its commitment to bolstering the UK's position as a global financial hub focusing on international competitiveness and growth.
- Victoria Saporta, Executive Director, Prudential Policy highlighted the PRA's new secondary objective, which emphasizes facilitating the UK economy's international competitiveness and growth over the medium to long term. This objective aligns with international standards, ensuring that the UK remains a key player on the global stage.
- The PRA's approach to this objective isn't entirely new. They initiated a conversation about a year ago with a Discussion Paper that outlined their policy approach. Saporta's speech in February further solidified the PRA's stance, proposing regulatory foundations that would guide their approach.
Three Pillars of Competitiveness and Growth
See: Canada’s Competition Problem: 7 Reasons
Saporta outlined three main foundations that the PRA believes are crucial for harnessing the UK’s strengths:
- Trust: A strong emphasis on maintaining trust in the PRA and the UK's prudential framework.
- Effective Processes: The need for streamlined regulatory processes and proactive engagement.
- Responsiveness: A commitment to addressing UK-specific risks and opportunities head-on.
A pilot survey conducted by the PRA provided valuable feedback from stakeholders. A whopping 93% of respondents expressed trust in the PRA’s framework, and a similar percentage appreciated the PRA's stable and predictable regulatory environment.
Operational efficiency stands as a key area of focus for the PRA. The authority is taking steps to enhance transparency, with initiatives like more frequent reporting on regulatory transactions.
What Can Canadian Regulators Learn?
Canadian regulators, like their counterparts worldwide, are constantly seeking ways to enhance their regulatory frameworks, ensure financial stability, and foster economic growth. Drawing from the insights of Victoria Saporta's speech at the Bank of England conference and the PRA's approach, here are a few select lessons Canadian regulators can learn:
See: NCFA Response to FINTRAC’s ‘Knee Jerk’ Regulations Requiring Donation Crowdfunding Platforms to Register and Comply with AML/ATF Legislation
1. Embrace a Clear Vision with Defined Objectives
The PRA's new secondary objective emphasizes facilitating international competitiveness and growth. Canadian regulators can similarly define clear, actionable objectives that align with both domestic needs and global standards. These should be S.M.A.R.T goals with measurable outcomes with performance updates being regularly communicated to industry and the public in a transparent and timely manner.
2. Streamline Regulatory Processes and Agility
Operational efficiency is crucial for a responsive regulatory environment. By simplifying processes, adopting technology, and ensuring transparency, Canadian regulators can make it easier for institutions to comply with regulations and for consumers to understand their rights.
3. Engage with Stakeholders
The PRA's pilot survey is a testament to the importance of stakeholder feedback. Canadian regulators can benefit from regular engagement with industry participants, consumers, and other stakeholders to gather insights and refine their approach.
4. Collaborate Across Regulatory Bodies
Financial regulation often involves multiple agencies and bodies. By fostering collaboration and coordination among these entities, Canadian regulators can ensure a holistic and consistent approach to financial oversight rather than create political headwinds or inefficiencies.
Conclusion
Victoria Saporta's enlightening speech at the Bank of England conference underscores the PRA's unwavering commitment to fortifying the UK's stature in the global financial arena. By emphasizing trust, operational efficiency, and responsiveness, the PRA sets a gold standard for regulatory frameworks. The insights gleaned offer invaluable lessons, not just for the UK but for global counterparts like Canada.
See: March 1, 2019: NCFA Submission to the Ontario Securities Commission on Regulatory Burden
As the financial landscape continues to evolve, the principles of clear vision, streamlined processes, engage with stakeholders, and inter-agency collaboration remain paramount. These guiding tenets, as highlighted by Saporta, serve as a beacon for regulators worldwide, ensuring that financial systems are robust, transparent, and in tune with the needs of the times.
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, artificial intelligence, 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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New York’s DFS Remove Ripple and Dogecoin from Greenlist
Crypto Regulation | Sep 19, 2023
Image: Unsplash/Shubham Dhage
The New York Department of Financial Services (DFS) has revamped its crypto oversight, notably removing Ripple, Dogecoin, and Litecoin from its approved "greenlist."
While DFS continues to lead in digital asset supervision, the crypto world is witnessing varied regulatory approaches globally. From Solana Labs emphasizing robust U.S. regulations to Hong Kong's potential tightening after the JPEX probe, 2023 is shaping up to be a landmark year for crypto governance and regulation.
What recent changes did the New York Department of Financial Services (DFS) announce regarding its virtual currency oversight?
- Yesterday, the New York Department of Financial Services (DFS) revealed an update to its virtual currency oversight regime. This update introduced new criteria for how digital firms licensed by the agency can list different cryptocurrencies.
- As a significant part of this overhaul, DFS removed over two dozen tokens from its “greenlist” of approved tokens. Notably, Ripple, Dogecoin, and Litecoin were among those removed. However, eight tokens, including Bitcoin, Ether, and the new PayPal Dollar, remain on the list.
See: Decoding Judge Rakoff’s Opinion: What It Means for Future Crypto Regulations
How has DFS positioned itself in the crypto regulation landscape?
- DFS has emerged as a nation-leading digital asset supervisor, primarily due to its BitLicense program and virtual currency unit.
- While the crypto industry often criticizes DFS for its rigorous licensing process, the recent guidance showcases DFS's balanced approach to crypto regulation. This is in contrast to other state and federal agencies that lean more towards enforcement actions.
What was the purpose of the DFS greenlist, and how has it changed?
- The DFS greenlist was created as an integral part of its broader crypto supervision. Previously, firms licensed by DFS could gain approval to custody and list tokens through a self-certification system. This system streamlined the process while still granting DFS a supervisory role.
- Once two firms had self-certified a token for either custody or listing, it would be added to the DFS greenlist.
- This meant that any DFS-licensed firm could approve the token for custody or listing, further speeding up the process. However, with the new guidance, the greenlist has been significantly reduced, now featuring only eight tokens.
How does the international crypto regulation landscape look in 2023?
- Internationally, the crypto regulation landscape is evolving rapidly. For instance, Anatoly Yakovenko, co-founder of Solana Labs, has emphasized the importance of comprehensive cryptocurrency regulations in the United States to maintain its leadership in the blockchain and Web3 sectors.
- Also, Hong Kong, a significant player in the crypto world, is considering tightening its crypto regulations. This comes in the wake of an investigation into the crypto exchange JPEX, which led to six arrests and numerous reports of financial losses.
Crypto regulations in the future
As the crypto industry continues to grow and evolve, regulatory bodies worldwide will likely introduce more stringent and detailed guidelines to protect investors and ensure market stability.
See: New U.S. Crypto Accounting Rules Come Into Effect in 2024
The recent actions by DFS and other global entities highlight the importance of a balanced approach to regulation, ensuring innovation while safeguarding investor interests.
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, artificial intelligence, 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 Accuses Binance.US of Not Cooperating With Investigation as Executives Exit
Crypto | Sep 15, 2023
Image: Unsplash/Loic Leray
Binance.US grapples with heightened SEC scrutiny and internal upheavals, marking a tumultuous phase for the leading crypto exchange
- The U.S. Securities and Exchange Commission (SEC) has accused Binance.US of not cooperating in an ongoing probe.
- The SEC alleges that the company's staking, clearing, and brokerage services violate federal securities law.
- The regulatory body is particularly concerned about Binance.US's use of Ceffu, a custody service offered by Binance's international arm. This, according to the SEC, violates a previous agreement intended to ensure that only local U.S. staff have access to funds.
Executives Exit and Internal Changes
- Adding to the complexity, key risk executives are leaving or recently exited Binance.US. company:
- Krishna Juvvadi, the head of legal;
- Sidney Majalya, the chief risk officer;
- This comes on the heels of the departure of Binance.US CEO Brian Shroder, who left the company amid layoffs of roughly a third of its workforce.
- Norman Reed, Binance.US's chief legal officer and general counsel, will step in as interim CEO.
- Reed is an alum of the SEC, having spent six years as special counsel in its market regulation division.
- His appointment follows Brian Brooks, who left the role citing differences over strategic direction.
See: SEC’s Sealed Court Filing Raises Eyebrows for Potential Binance Setback
The regulatory challenges facing Binance.US are a microcosm of the broader issues affecting the cryptocurrency industry. As the SEC tightens its grip, the company is undergoing significant internal changes, including executive departures and layoffs.
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, artificial intelligence, 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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Support NCFA by Following us on Twitter!Follow @NCFACanada |
SEC Charges ‘Stoner Cats’ For Selling $8M of Unregistered Crypto Securities
Enforcement | Sep 15, 2023
Image: Unsplash/Wayne Low
The U.S. Securities and Exchange Commission (SEC) has taken action against the creators of the popular animated web series, Stoner Cats.
What Are Stoner Cats?
Stoner Cats is a popular adult animated web series that has garnered significant attention in both the entertainment and crypto worlds. The concept of "Stoner Cats" involves house cats that gain sentience after being exposed to their owner's medical marijuana. This marijuana is used to alleviate the symptoms of early Alzheimer's disease. The series released six episodes from July 2021 to December 2022, and boasts a cast of well-known actors, including Jane Fonda, Mila Kunis, Ashton Kutcher, Seth MacFarlane, and Chris Rock.
See: LA-Based Entertainment Company, Impact Theory, Faces SEC Charges Over Unregistered NFT Securities Offering
The creators introduced a unique concept where the Non-Fungible Tokens (NFTs) provided holders with exclusive access to watch the series online. These NFTs were marketed as tickets, with the idea being that the more successful the show became, the more valuable the NFTs would be.
Over 10k NFTs Sold in 35 Minutes
On July 27, 2021, SC2 offered and successfully sold over 10,000 NFTs at approximately $800 each, raising a staggering $8 million from investors. This sale was completed in a record 35 minutes. The NFTs were marketed as a ticket to the Stoner Cats web series, with the promise that the success of the show would directly correlate with the success of the NFTs.
Charge and Settlement
The SEC has formally charged Stoner Cats 2 LLC (SC2) for conducting an unregistered offering of crypto asset securities in the guise of NFTs. This move by the SEC was aimed at ensuring that the creators of Stoner Cats adhered to the federal securities laws. Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized that regardless -of the nature of the offering, it's the economic reality that determines its classification as an investment contract and, consequently, a security. The SEC's primary concern was that Stoner Cats marketed its expertise in crypto projects and led investors to believe they would profit from selling the NFTs in the secondary market.
See: SEC Chair Gensler’s Mixed Feedback at Senate Hearing
Without admitting or denying the SEC’s findings, SC2 has agreed to a cease-and-desist order. They will also pay a civil penalty amounting to $1 million. As part of the settlement, SC2 has committed to destroying all NFTs in its possession and will publish a notice of the order on its official platforms.
The SECs Regulation by Enforcement Continues
This case underscores the SEC's increasing scrutiny of the rapidly evolving NFT space. The regulatory body aims to ensure that firms involved in the production or trading of digital assets adhere to the necessary securities laws. The Stoner Cats case serves as a reminder that while the world of NFTs offers immense potential, it is not exempt from regulatory oversight.
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, artificial intelligence, 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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