Blockchain Firm Settles Unregistered ICO with the SEC

SimplyVital Health, Inc. – a healthcare- based blockchain firm – has settled with the United States Securities and Exchange Commission (SEC) over an allegedly unregistered $6.3 million initial coin offering (ICO).

According to SEC, the New England-based SimplyVital Health, Inc. planned to create a healthcare-related blockchain ecosystem, dubbed Health Nexus. The firm publicly announced plans to build its platform through the sale of its Health Cash (HLTH) token in 2017. Based on the charges brought by SEC, the commission alleges that the company raised more than $6 million through a pre-sale of its token.

Notably, the pre-sale was offered under a simple agreement for future tokens (SAFTs) arrangement – a model which is designed to simplify the ICO process and reduce the risk of enforcement actions by offering investment contracts rather than tokens. Following the pre-sale, which closed in April 2018, the firm did not move forward with the planned public offering.

Respectively, SimplyVital made use of the SAFT arrangement that stipulated tokens would not be dispersed to investors until SimplyVital created its platform. However, following the pre-sale, which closed in April 2018, the firm did not move forward with the planned public offering.

Subsequently, SEC concluded that the blockchain healthcare company had violated provisions of the Securities Act of 1933 and “did not file a registration statement with the Commission or qualify for an exemption from registration before offering and selling HLTH to the public through the SAFTs.”

Following this, SimplyVital, whilst neither admitting nor denying the SEC’s charges, has agreed to comply with SEC’s cease and desist order and will face no further penalty, as the firm had already returned to investors “substantially all of the funds raised during its pre-sale” by April 19th 2019.

According to industry sources, many had reported in 2018 that the SEC was most likely going after SAFT sales. An unnamed source stated at the time:

“The SEC is targeting SAFTs. The new approach of the SEC is to consider tokens as both utility and security at the same time, meaning a token can bring utility to a platform but at the same time can be considered as a security if you sold it to parties that mainly looked for profit on its increase in value.”

After releasing its July 2017 DAO Report of Investigation, which introduced the crypto industry to the Howey Test, the SEC has efficiently followed a consistent pattern of enforcement, which has been laid out over the last two years, and picked off one ICO after another over the unregistered sale of securities.

In public statements, Chairman Jay Clayton has stated that the SEC believes virtually every ICO ever conducted in the United States has violated federal securities laws.

Most recently, it had been reported that a U.S. District Court authorized an emergency freeze to lock up $8 million raised in an ICO by a New York citizen alongside with two of his entities. Seemingly, the SEC claimed that Reginald Middleton, Veritaseum Inc. and Veritaseum LLC had raised the funds in an ICO that was a fraudulent, unregistered securities offering.

Chinese Police Investigate EtherDelta for Potential Exit-Scam

Chinese police have reportedly initiated an investigation against non-custodial token trading platform EtherDelta after being suspected of participating in an exit scam.

EtherDelta is a DEX that was founded by Zachary Coburn and it is mainly a trading platform for Ethereum tokens (ERC-20). It enables users to trade digital assets by means of an order book and Ethereum blockchain-powered smart contracts.

On Wednesday, August 7th, Dovey Wan – a Founding Partner of blockchain-focused venture investment firm Primitive Ventures, reported in a series of tweets that Chinese police are investigating an alleged exit scam involving a token listed on decentralized exchange (DEX) EtherDelta.

Wan noted through a series of tweets that the alleged exit scam, involving the sale of native exchange asset EtherDelta Token (EDT), took place after EtherDelta had been acquired by unnamed Chinese investors.

“The actual beneficiaries of EtherDelta are all Chinese after ownership transition in 2017 […] Basically [the founder] Zack Coburn sold EtherDelta to a group of Chinese who later issued exchange token $EDT and turned out to be a exit scam. Now furious investors of $EDT whistle blowed to local police the case was recently taking into official investigation process.” 

Respectively, the police was informed by the “furious investors”. Wan further added that the Chinese police shows no mercy in instances when any crypto scam involved large amount of retail capital.

In addition to that, Wan also shared a snapshot of the ownership agreement signed between Coburn and the Chinese buyers. She further alluded that the new owners bought it with the intent to use it as a front to issue their initial coin offering (ICO).

Prior to this, the exchange platform had faced legal challenges when the U.S. Securities and Exchange Commission (SEC) filed charges against EtherDelta founder Zachary Coburn for running a securities exchange without a license.

Almost all of the orders placed through EtherDelta’s platform were traded after the Commission issued its 2017 DAO Report, which concluded that certain digital assets, such as DAO tokens, were securities and that platforms that offered trading of these digital asset securities would be subject to the SEC’s requirement that exchanges register or operate pursuant to an exemption,” stated the regulator.

At that time Coburn neither admitted nor denied the charges, however consented to the order and agreed to pay $300,000 in unlawful profits plus $13,000 in prejudgment interest as well as a $75,000 penalty.

Earlier in May, crypto analytics startup Coinfirm found that over 500 of the Ether (ETH), which had been stolen from hacked New Zealand-based cryptocurrency exchange Cryptopia and were worth over $125,000 —  had been moved to EtherDelta.

UN Report Claims North Korea Implicated in Cryptocurrency Exchange Hacks

A confidential United Nations report claims that North Korea is using “widespread and increasingly sophisticated” cyberattacks to steal cryptocurrency and fiat currency in order to fund its weapons of mass destruction programs, Reuters says.

The confidential report, compiled by a group of independent experts and obtained by Reuters, was submitted last week to the U.N. Security Council’s North Korea sanctions committee. The report stated that North Korea had used hacks to steal funds from financial institutions and cryptocurrency exchanges, collecting roughly $2 billion, which was laundered over the web.

As the attacks are becoming harder to track, the group of experts is currently investigating at least 35 reported instances of DPRK actors attacking financial institutions, cryptocurrency exchanges and mining activity designed to earn foreign currency in 17 nations. According to the report, these cyber actors are operating under the direction of the Reconnaissance General Bureau – North Korea’s top military intelligence agency.

The experts’ report notes that large-scale attacks against cryptocurrency exchanges by North Korea allow the country to generate income in ways that are harder to trace and subject to less government oversight and regulation than the traditional banking sector.

The report further notes that North Korea is using new techniques to earn hard currency for its illegal activities. Many of the entities, operating as ploys, “continued to operate overseas, including under diplomatic cover, attempting to transfer conventional weapons and expertise and to procure equipment and technology” to the country.

In addition to that, according to experts North Korea continues to have access to the global financial system, through bank representatives and networks operating worldwide due to failure to implement financial sanctions as well as due to Pyongyang’s deceptive practices.

Furthermore, North Korea has also continued to disregard sanctions using illegal ship-to-ship transfers of coal and refined petroleum products. The report claims to have identified new evasion techniques for such transfers including feeder vessels using Class B Automatic Identification Systems and multiple transfers using smaller vessels.

Prior to this, other reports have linked North Korea to major hacks at crypto exchanges such as the massive hack of Japan’s Coincheck exchange platform, which resulted in a theft of more than $500 million worth in cryptocurrency.

Most recently, it has been suggested that North Korean hackers have been targeting users of the UPbit exchange with phishing email campaign.

Upon being asked about the report, an U.S. State Department spokeswoman voiced her opinion on the matter:

“We call upon all responsible states to take action to counter North Korea’s ability to conduct malicious cyber activity, which generates revenue that supports its unlawful WMD and ballistic missile programs.”

Meanwhile, the U.N. Security Council held a closed-door meeting last week at the request of Britain, France and Germany, in order to discuss Pyongyang’s recent missile launches, and the three renewed the need to enforce U.N. sanctions.

NYDFS Establishes Separate Division for Crypto-Related Businesses

The New York State Department of Financial Services (NYDFS) – the state’s financial regulator – is establishing a new division that will be in charge of licensing as well as regulating crypto-related businesses, and moving its in-house team supervising cryptocurrency businesses to the new division.

In an official statement, the NYDFS introduced the new division at the Department of Financial Services, which will be named the Research and Innovation Division, and it will be responsible for assessing emerging financial technologies as well as licensing and supervising virtual currencies.

The agency further confirmed that the division will also be responsible for licensing approvals made under the state’s BitLicense, a regulatory body system that manages firms buying, selling or issuing cryptocurrencies to consumers within the New York state.

In addition to that, the report brought attention to a number of appointments to the division. Particularly, the new division will be led by Matthew Homer, who previously served as the head of policy and research a fintech firm called Quovo as well as had worked at the Federal Deposit Insurance Corporation and the United States Agency for International Development.

Matthew Siegel and Olivia Bumgardner – two deputy superintendents – will serve under Homer. Prior to this, Siegel was a trial attorney at the Antitrust Division of the U.S. Department of Justice, and had worked at the Assistant Attorney General in the Antitrust Bureau of the New York State Office of the Attorney General.

At the moment, Bumgardner is the director of research at NYDFS and has previously led initiatives and projects related to cybersecurity, financial inclusion and digital currencies. Andrew Lucas, who was previously senior counsel at the New York City Law Department, will be counsel to the new division.

Linda Lacewell, the newly appointed superintendent has stated:

“This new division and these appointments position DFS as the regulator of the future, allowing the Department to better protect consumers, develop best practices, and analyze market data to strengthen New York’s standing as the center of financial innovation.”

Lacewell strongly believes that “the financial services regulatory landscape needs to evolve and adapt as innovation in banking, insurance and regulatory technology continues to grow.”

Meanwhile, the NYDFS has been regulating crypto-related businesses since 2015, when its BitLicense program came into effect. Seemingly, the financial regulator had only granted eight BitLicenses in the first three years of operating. At the moment, there have been over 20 licenses granted to cryptocurrency firms.

Most recently, Lacewell had approved two subsidiaries of the crypto exchange Seed CX to operate in the state under the BitLicense.

Poloniex Moves Abroad Due to Uncertain US Regulation Framework

Due to increasing regulatory pressures in the United States, crypto platform Circle has announced that it is expanding its global offerings with the launch and regulatory licensing of a new subsidiary in Bermuda.

The company announced on Monday via their official blog, stating that from now they will serve non-US Poloniex customers with the new Bermuda operations, and will expect to offer many new digital asset services from Bermuda over time.

Poloniex – the Boston-based exchange Circle purchased for $400 million in the height of the initial coin offering boom – has struggled to pick up market share over the past year, according to data, with a staggering difference from its today’s 1% market share and the 58% it had just two years ago.

For now, non-US customers will use Poloniex through the new Circle International Bermuda subsidiary. The company plans to release in the coming months new services including new crypto asset listings, advanced trading products, and other innovations, which will be available to all non-US customers.

Unfortunately, due to US regulatory limitations, the firm will not be able to offer many of these new services to US clients for now. However, the company will continue to serve US clients to the best of its abilities. Circle will also continue its existing operations in the US, Ireland, the UK, and Hong Kong.

After working closely with the Bermuda government, the subsidiary has been granted the Digital Assets Business Act of 2018 license (“DABA”).  Class F DABA provides a comprehensive framework for the regulation and oversight of crypto financial services including digital asset issuance, sale and redemption, exchange operations, and custodial services.

Due to the license, Circle is also required to comply with strict international standards, including anti-money laundering (AML) and combating the financing of terrorism (CFT) in ways that are compliant with Financial Action Task Force (FATF) standards.

Circle CEO Jeremy Allaire has stated that the lack of regulatory frameworks significantly limits what can be offered to individuals and businesses in the U.S.

He further added:

“The project to establish a new international operations hub for our market, exchange and wallet services, was a major project. […] It took a long time working with the Bermuda government and the Bermuda Monetary Authority.”

Looking forward, Allaire claimed more diverse assets will be soon available to global customers, and that Poloniex might also expand to financial services, which the startup previously couldn’t offer in the U.S.

The expansion into Bermuda follows its roll-out of fiat-to-crypto trading.  Meanwhile, insiders claim that the firm is hoping recent additions to its platform will save its market share from deteriorating further, like its recent relaunch of the Trollbox trader forum.

They believe this is less about Circle adhering to strict regulations and more about the firm looking for an avenue to list more tokens as it walls off U.S. clients from certain assets and regulatory pressure in the U.S. mounts. Recently, different state and federal regulators have launched investigations into exchanges including BitMEX and Bitfinex. Likewise, Bittrex has delisted a number of cryptocurrencies trading in the U.S.