Blockstack is the First SEC-Approved Token Offering Under Reg A+

The United States Securities and Exchange Commission (SEC) has granted blockchain-based startup Blockstack clearance to run a $28 million public token offering under Regulation A+, according to an official blog post from Blockstack.

According to news, Blockstack will launch its token offering online on Thursday, July 11th.  It will be open to any purchaser in the U.S. and globally, who would like to take part in the Blockstack next-generation computing network.

Blockstack is a blockchain builder that has raised $47 million through a previous token offering under Regulation D, which is a different provision that does not require SEC approval but is only limited to accredited investors. In comparison, Regulation A+ is open to all companies and individuals and serves as an initial public offering (IPO) alternative for smaller companies to publicly raise money with less strenuous accounting and disclosure standards than a regular IPO requires.

Although previously companies have taken advantage of Regulation A+ funding, this marks the first time that investors will receive a token, rather than shares in the company. This development has the potential to be a game-changer for other crypto startups that are looking to sell tokens but not equity in their companies whilst also remaining SEC-compliant.

Blockstack founder Muneeb Ali has shared his enthusiasm, however stated that the process has very long and costly since the SEC had to devise a brand new protocol for token offerings under Reg A+, something the regulator had never done before.

Accordingly, the startup has spent 10 months and approx. $2 million to gain approval from the SEC. Ali apparently said that Blockstack had to develop a protocol for running what is essentially a regulated ICO through Regulation A+ from the ground up.

This is possibly a precedent-setting moment for the crypto space, according to reports. Initial coin offerings (ICOs) have lost much of their appeal ever since they became the target of an SEC crackdown. According to WSJ data, ICOs attracted less than $120 million to their coffers in Q1 2019 in comparison nearly $7 billion in the year-ago period.

Meanwhile, recent poor performances and fraud concerns surrounding some of the Reg A+ IPOs have discouraged Nasdaq and the New York Stock Exchange from Reg A+ listings. Against this backdrop, having the SEC’s approval on a Reg A+ token offering may shed light on a new path for blockchain companies to raise funds under regulation, according to the startup.

Now that Blockstack has successfully created this new path for blockchain companies to raise funds, certainly more companies will now be encouraged to seek SEC approval for their token offerings rather than argue with the regulator that their tokens are not securities.

SEC and FINRA Share Outstanding Issues with Crypto Custodians

The United States Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have issued a joint statement on July 8th, in which they outlined regulatory compliance issues for cryptocurrency custodians.

Both agencies believe that there are a number of questions they need to address before they can approve crypto companies’ applications to become broker-dealers.

The statement outlined important criteria for both institutions’ approach to broker-dealer regulation, investor protection including when assets are deemed as securities under the 1970 Securities Investor Protection Act (SIPA), as well as various factors related to many of these questions such as when to consider approving a broker-dealer application of crypto-related companies.

The statement reads:

“The requirements of the Customer Protection Rule have produced a nearly 50-year track record of recovery for investors when their broker-dealers have failed. […] This record of protecting customer assets held in custody by broker-dealers stands in contrast to recent reports of cybertheft, and underscores the need to ensure broker-dealers robust protection of customer assets, including [cryptocurrency] securities.”

Broker-dealers in the U.S. are registered and regulated to buy and sell securities for themselves or their clients. And some firms use digital assets such as securities, thus allowing them to cater to institutional investors that cannot hold or directly buy assets.

“Put simply, the Customer Protection Rule requires broker-dealers to safeguard customer assets and to keep customer assets separate from the firm’s assets, thus increasing the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure,” notes the report.

Apparently, the agencies claim that a crypto custody service may not be able to sufficiently prove that it actually controls the assets it supposedly holds. For instance, although a broker can verify that it has private keys to a crypto wallet, the challenge is to prove that no other individuals or institutions hold a copy of the private key, which could allow them to transfer digital asset security without obtaining permission from the broker-dealer.

In addition to that, if the transaction is made successfully, the custodian has no power to reverse it. This is applicable to all transactions a custodian wants to cancel or reverse.

Apart from custodial services, the regulators have suggested in the statement that they consider over-the-counter (OTC) trading, where brokers do not have custody of the digital asset securities, as lower-risk. This would mean such OTC trading would not require high levels of scrutiny. The report further tackles issues such as non-custodial service registration, bookkeeping policies, and liquidation following SIPA’s protocol.

Meanwhile, the SEC requested feedback back in March on how it might regulate crypto settlements. The agency showed further interest in the role of custodians in non-delivery versus payment trading as well as what safeguards are currently in place.

Bancor to Restrict Access to US-based Traders

Decentralized cryptocurrency exchange (DEX) Bancor has announced that it stop providing its trading service to US-based clients.

Bancor Stops Servicing the U.S.

According to the announcement, a lack of clarity from regulators is the main reason behind the decision to ban all users with a U.S. IP address from exchanging digital currencies.

“US citizens, domiciliaries or users from US IPs will no longer be able to use Bancor’s web application, https://www.bancor.network, to convert tokens,” the announcement noted. “This decision has been made in light of increased regulatory uncertainty; at this time, we believe this is the most judicious decision for all the members of our ecosystem.”

Bancor runs as a decentralized protocol using a peer-to-peer (P2P) architecture. This is the latest development in the uncertain regulatory market for decentralized trading applications.

Previously, DEX Ether Delta’s founder was charged with operating an unregistered exchange, resulting in a fine of $300,000. It’s not clear what the regulator requirements are for firms offering decentralized financial services, in which users trade peer-to-peer.

The company also clarified that any clients, who have been identified as US citizens and not staying in the country, cannot use its trading services, while people from overseas staying in the US can still trade on the platform.

“We would like to clarify that this functionality will be blocked to users accessing the website bancor.network, which offers an interface to blockchain activity. As the Bancor Liquidity Network is a collection of smart contracts on the blockchain, and a non-custodial system, we cannot restrict users from accessing the blockchain itself. This cannot be blocked.”

U.S. Being Excluded From Several Platforms

The non-existent regulatory guidelines from official institutions in the U.S. are forcing many cryptocurrency companies to stop servicing the region. Recently, Binance one of the largest crypto exchanges in terms of trading volume, announced that it will halt trading in the U.S. starting September 12th.

Another U.S.-based crypto exchange, Poloniex, delisted nine digital currencies from its trading platform only for US-based clients, citing the same unclear regulations. It is expected that the SEC and other financial regulators in the U.S. are preparing a regulatory framework that will see many digital currencies classified as securities.

New international recommendations from the Financial Action Task Force, set for publication this week, will place stringent new ID requirements on any entity facilitating cryptocurrency trading, both in the U.S. and elsewhere.

SEC Sues Kik Over Its 2017 Token Sale

The U.S. Securities and Exchange Commission (SEC) sued Kik Interactive Inc. for illegally raising $100 million during a 2017 token sale, making this one of its highest profile cases targeting a company for not registering an offering with the regulator.

In a filing submitted Tuesday in the Southern District of New York, the SEC said Kik violated Section 5 of the Securities Act of 1933, which requires offerings to be registered.

The current law states that all those selling financial instruments deemed securities to US investors must first register their offering with the SEC. Since Kik did not, the firm is now being sued.

Kik, whose product is an online messaging application, raised more than $55 million from U.S. investors by selling a digital token called Kin without the proper disclosures, the SEC said in a Tuesday court filing. The agency is seeking undisclosed monetary penalties.

Steven Peikin, co-head of the SEC’s enforcement division stated:

“Companies do not face a binary choice between innovation and compliance with the federal securities laws,”

The SEC has been looking with skepticism at ICOs for years, arguing that the sales are likely securities that must follow federal rules. The regulator has publicly advised investors of the risks in buying tokens during an ICO, cautioning that scammers might be using them to lure investors into frauds.

In late 2016 and early 2017, Kik faced a crisis, according to the SEC filing.

Fewer and fewer people were using Kik Messenger. The company expected to run out of cash to fund its operations by the end of 2017, but its revenues were insignificant.”

Then the company decided to do an ICO, in what a board member called “a hail Mary pass,” according to the filing.

Kik was among the biggest initial coin offerings in the past two years and had prominent backers.

Kin recently launched a crowdfunding site called DefendCrypto.org to raise money to fight back against an SEC investigation into the firm, and the agency’s broader crackdown on ICOs.

Kik argues that it has attempted to work with the SEC over the past 18 months and has spent over $5 million in the process. Many in the cryptocurrency community believe the case could help clarify when a token will be considered a security and subject to SEC regulations.

SEC Delays VanEck ETF Proposal Seeking Public Comments

The U.S. Securities and Exchange Commission (SEC) has again postponed making a decision on the VanEck, SolidX, and Cboe joint proposal bitcoin exchange-traded fund (ETF) proposal.

The proposal was filed in January and was delayed in March. In a new document filed Monday, the SEC stated that it was in the process of establishing proceedings on whether to approve or disapprove a proposed rule change that would allow the VanEck SolidX Bitcoin Trust to issue and list its shares on the New York Stock Exchange (NYSE).

Currently, the commission is seeking more comments from public on the proposed ETF as they have received only 25 comments so far. The deadline to submit comments is due 21 days from when the order is published and rebuttal to the comments are due 35 days after the publication.

Following this, the new deadline for the SEC to make its decision has been set up for August 19th , and it could be delayed one more time for a final deadline of October 18th, according to attorney Jake Chervinsky.

Originally, the bitcoin ETF proposal was first filed with the SEC last year, however due to the U.S. government shutdown it was withdrawn in January this year. VanEck/SolidX refiled the proposal later that month, only to receive a delay notice for March 29th. Similarly happened to the proposal filed by Bitwise Asset Management with NYSE Arca.

The commission has postponed making any decision on the two proposals so far this year, with the latest delay on Bitwise’s proposal coming on May 14th. Following this news, the VanEck/SolidX proposal joins the long list of failed attempts to get an ETF approved by the SEC.

Meanwhile, the commission has issued several extensions and rejections on ETF proposals, citing concerns that the proposals did not meet and satisfy SEC standards to prevent fraud, market manipulation, financial crime, liquidity amongst others.

Following today’s announcement, the SEC has reiterated these concerns:

“The Commission is instituting proceedings to allow for additional analysis of the proposed rule change’s consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,” and “to protect investors and the public interest.”

The SEC’s repeated delays in sanctioning a bitcoin ETF may reflect its lack of confidence in the maturity of the crypto market. As such, the regulator has turned down at least 10 ETF proposals to date and it has yet to approve one.

In response to the repeated delays, VanEck digital asset strategy director Gabor Gurbacs has stated that “we continue the hard work towards better-regulated, safer and more liquid digital assets markets. Bitcoin is too big to ignore.”