Posted on

Riot Blockchain to Launch Regulated Crypto Exchange in the US

Riot Blockchain is planning to launch a regulated crypto exchange in the U.S.

The publicly traded U.S. company that has faced regulatory issues for a sudden pivot to blockchain, revealed in a filing with the U.S. Securities and Exchange Commission (SEC) Friday that the new entity will be called called RiotX and will develop three main services: banking, trading and a digital wallet.

The application follows the firm’s change in business focus after almost two decades in biotech, when it rebranded to Riot Blockchain from Bioptix and shifted focus to crypto mining in October 2017. The firm later acquired a crypto brokerage and said it planned to build an exchange in March 2018.

The company was subpoenaed by the SEC a month later over its sudden shift to a blockchain business model and a resultant stock price hike.

During 2018 and 2019 the company also changed its board of directors, beginning with the resignation of its CEO.

In the SEC filing, made public on March 14, the company explains that the new exchange is expected to be handled by its subsidiary RiotX Holdings Inc, adding that its main focus is still on bitcoin mining.

For RiotX’s banking services, the company says it will launch an API created by software provider SynapseFi. Users will be able to create accounts connected to accredited banking institutions inside the U.S., allowing them to hold and transfer either fiat or crypto assets.

The API will also track the location and identity of users “in order to prevent fraud and improper use of its RiotX exchange”, as explained by the company. This includes the use of the service in U.S. states where crypto exchanges are not legalized, which points to a restricted range of customers to begin with.

As Riot Blockchain explained in the registration:

“SynapseFi’s API will enable to Company to know where the user is when accessing RiotX, thereby enabling the Company to prevent a user from Montana, a state where the exchange of digital currencies is permitted, from traveling to neighboring Wyoming, where the exchange of digital currencies is not permitted, and using RiotX in the prohibited jurisdiction.

Regarding the upcoming trading services, RiotX will be working with exchange software provider Shift Markets, having it terminated its contract with Canadian exchange Coinsquare during the SEC investigation in 2018.

The firm expects RiotX to ultimately operate in all U.S. states bar Hawaii and Wyoming by the end of 2019. At time of registration, the firm claims to already have approval in five states.

U.S. flag image via Shutterstock

Posted on

SEC’s Valerie Szczepanik at SXSW: Crypto ‘Spring’ Is Going to Come

The U.S. Securities and Exchange Commission’s Valerie Szczepanik is optimistic that regulation will ultimately boost the cryptocurrency market.

“I do think if we hope to smell the crypto spring in the air, it will take people walking with the regulators,” Szczepanik, the SEC’s senior advisor for digital assets, told a crowd Friday at SXSW in Austin, Texas. “But I do think the spring is going to come.”

In a Q&A session with attorney Daniel Kahan of Morrison & Foerster LLP, Szczepanik emphasized how the regulatory approach at the SEC is designed to let innovation flourish, though it comes at the cost of not providing completely clear guidelines for new kinds of businesses.

“The lack of bright-line rules allows regulators to be more flexible,” she said.

While respecting the desire from entrepreneurs to know whether they can or can’t run a business in full compliance with current securities laws, she said the principles-based approach allows more opportunities to arise from new technology.

She told attendees:

“I think if you were to propose a new regime of regulations in a precipitous way without really studying it, you might end up steering the technology one way or another.”

When asked for her thoughts on the rise of stablecoins, Szczepanik noted that there as several arrangements that allow these tokens to maintain a relatively stable price relative to other assets.

She singled out stablecoins that create two assets – one that maintains a fixed price and the other whose value fluctuates in order to help the first token’s price stay fixed (often referred to as algorithmic stablecoins).

With regard to that particular category of project, she said, “You might be getting into the land of security.”

“Folks like to put labels on things,” Szczepanik said of stablecoins, “but we’ll always look behind the label to see exactly what’s happening. We’ll give it the label it deserves under the law.”

Appropriate penalties

A topic that she returned to multiple times during the 90-minute talk was the SEC’s FinHub, where companies can come in and talk with staff about approaches they are taking. Kahan offered a rule of thumb: “It’s always better to find your regulators than to let your regulators find you.

Szczepanik emphasized that dialogue with the SEC yields better outcomes for companies. In particular, she highlighted recent regulatory action against Gladius, a cybersecurity company defending against distributed denial of service (DDoS) attacks. Its settlement was announced in February.

As the agency acknowledged in that settlement, it did not impose a penalty on Gladius because the firm self-reported and communicated with regulators throughout the investigation.

That said, rather than focus entirely on regulatory action against companies, Szczepanik also argued that businesses can do better by working with regulators from the start.

She acknowledged that some companies will go offshore in search of more lenient regulatory regimes, but she said the real opportunity is with companies that abide by the stronger U.S. rules. “There are benefits to doing it the right way. And when they do that they will be the gold standard,” she contended.

Beyond the U.S., Szczepanik said regulators around the world are in regular contact about distributed ledger technology. “I think there’s a lot of excitement around the globe about how DLT can be deployed to increase efficiency,” she said.

No-action letters

One form of relief that entrepreneurs have been seeking since the earliest days of the initial coin offering boom have been no-action letters. That is, letters from the SEC that acknowledge a review of a companies business process and affirm that the SEC will not take regulatory action against it.

Szczepanik has emphasized these before. However, attorneys in the space have noted that thus far no no-action letters have been issued.

Regardless, Sczczepanik’s fundamental message was that companies will have better outcomes if they interact with securities regulators. To that end, she is going on the road now to give more entrepreneurs the opportunity to reach her.

She concluded:

“We’d much rather have people come and ask us before they do something rather than coming and asking for forgiveness.”

SEC Senior Advisor for Digital Assets Valerie Szczepanik speaks at SXSW 2019

Posted on

SEC’s ‘Crypto Mom’ Sees No Need for National Blockchain Policy

A notably blockchain-friendly member of the U.S. Securities Exchange Commission (SEC) has pushed back on an industry lobbyist’s call for a coordinated national strategy for the technology.

The Digital Chamber of Commerce’s National Action Plan calls on the federal government to “make blockchain technology a priority,” by publicly supporting development in the space, adopting a formal light-touch regulatory approach, creating clear policies and regulations based on what the technology does (rather than the type of technology used) and preventing a “regulatory patchwork” by coordinating state and federal efforts.

“If we want the United States to be a leader in advanced technology we have to take action,” Perianne Boring, who founded the Chamber, said in her opening remarks at the organization’s D.C. Blockchain Summit this week. “It is time the United States introduced a national strategy for blockchain.”

Boring brought the action plan up again the next day, during a fireside chat with SEC Commissioner Hester Peirce, whose dissenting vote to approve a bitcoin ETF earned her the nickname “crypto mom” last year. And Peirce sounded lukewarm at best about the idea.

“What types of action would you like to see the government take?” Boring asked Peirce of the plan. The Commissioner’s response focused on the need for innovation to come from the private sector, rather than having the federal government facilitate large-scale cooperation across the country.

“People think ‘oh wouldn’t it be great if we coordinated this from the government’ and that has gotten us into lots of problems in the past,” Peirce said, adding:

“We need to have clear regulatory guidelines, that’s something I think you’ve been very forthright in calling for, which I think is really important. We do need to let people know where they stand, but then within that we need to let people do what they want to do and try not to have too much government partnership with the private sector.”

The government should just set up those guidelines and “let the innovation happen on its own,” she added.

‘Come in and tell us’

That said, Peirce encouraged the technologists and entrepreneurs in the room to pipe up.

What innovators can do is reach out to the SEC and other government agencies and let them know where specifically they need clarity, Peirce said, adding that, “you all need to come in and tell us where the pain points are, where the old regime doesn’t fit, and then we can move forward with guidance.”

In her comments, the Commissioner explained that she would like to see Commission-level guidance issued which clearly outlines where the legal lines are and how blockchain projects might interact with those lines, “but we need from you examples of where that would be helpful.”

Part of the hangup between developers in the blockchain space and the SEC may be the speeds at which each group typically works. Relative to the SEC’s perspective, the agency is “moving quickly,” but from a blockchain project’s point of view, the regulator may be moving very slowly, Peirce said.

She highlighted the SEC’s FinHub division, which is focused on interacting with blockchain and other fintech startups. On the branch’s website is a submission form, which Peirce hopes technologists will use. To date, only a handful of projects have actually provided feedback:

“We’ve gotten … maybe five or six letters and I was pretty disappointed by that. It does take work on your part but we really need people to be writing in.”

Hester Peirce photo by Nikhilesh De for CoinDesk

Posted on

Will Fiat-Backed Stablecoins Pass Legal Muster With the SEC and CFTC?

Benjamin Sauter and Jake Chervinsky of Kobre & Kim LLP are litigators and government enforcement defense attorneys who specialize in disputes and investigations related to digital assets. This article is not intended to provide legal advice.

––––––––––

As we enter the second year of this so-called “crypto winter,” the stablecoin market is hotter than ever.

In recent months, stablecoins – digital assets pegged to the value of fiat currencies like the U.S. dollar – have exploded in size and variety thanks to high-profile offerings from companies like Circle, Paxos and Gemini. Even traditional banks are joining the action, with JP Morgan recently announcing its own stablecoin-like product called JPM Coin.

Thus far, stablecoins have largely avoided public scrutiny and criticism from agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which have focused their attention on the many issues arising out of the 2017 initial coin offering bubble instead. Yet, as stablecoins see greater capital inflows and industry adoption, the SEC and CFTC will likely take a harder look at their compliance status.

Unfortunately for stablecoin proponents, agencies like the SEC and CFTC are often quick to assert their jurisdiction over new financial innovations, even if their intervention may not serve the best interests of an emerging industry.

Stablecoins 101

Stablecoins promise many of the same benefits as other cryptocurrencies – like cheap transactions and rapid settlement – without the price volatility typically found in the crypto markets. Through that combination, stablecoins could satisfy the demand for high-quality fiat currencies in parts of the world with limited access to the global financial system, like Iran or Venezuela.

Stablecoins also could be useful for crypto exchanges that want to offer fiat-based trading pairs while reducing their engagement with legacy financial institutions.

To maintain their one-to-one peg with fiat currencies, most stablecoins use either a fiat-collateralized, crypto-collateralized, or algorithmic model. Fiat-collateralized stablecoins are backed by actual fiat currencies held in reserve by the stablecoins’ issuers, whereas crypto-collateralized stablecoins are backed by digital assets locked in smart contracts.

Algorithmic stablecoins, by contrast, aren’t backed by collateral at all. Instead, they use various mechanisms to expand or contract their circulating supply as necessary to maintain a stable value.

It was this type of stablecoin that apparently caught the SEC’s attention last year.

A basis for concern

In April 2018, an algorithmic stablecoin project called Basis made headlines when it raised $133 million from several prominent funds and venture firms. But, only eight months later, Basis shut down unexpectedly and returned its remaining capital to investors. The reason for the shuttering, according to Basis CEO Nader Al-Naji: “We met with the SEC to clarify a lot of our thinking [and] got the impression that we would not be able to avoid securities classification.”

It’s not hard to see why the SEC might view Basis through the lens of a securities offering.

The Basis protocol was designed to maintain stability by auctioning “bond” and “share” tokens to investors who would profit as long as Basis held its peg. Tokens like these could qualify as “investment contracts” under U.S. law, and thus may fall within the definition of a security. Apparently, the Basis team decided that the regulatory requirements imposed by that classification were too onerous to overcome.

Despite Basis’ startling end, there hasn’t been much discussion in the crypto industry about how U.S. securities and commodities laws might apply to stablecoins.

In fact, most industry players seem to take for granted that fiat-collateralized stablecoins are safe from regulatory scrutiny. That assumption may prove dangerous.

Stablecoin regulation under federal law

Most dollar-backed stablecoins are created in roughly the same way: purchasers deposit dollars with a stablecoin issuer, and in exchange, the issuer mints and returns an equivalent amount of the stablecoin. The process also works in reverse: stablecoin-holders can send a stablecoin back to its issuer in exchange for an equivalent amount of dollars.

Given how these stablecoins are redeemed, the SEC might characterize them as “demand notes,” which are traditionally defined as two-party negotiable instruments obligating a debtor to pay the noteholder at any time upon request.

According to the Supreme Court’s 1990 decision in Reves v. Ernst & Young, demand notes are presumed to be securities under Exchange Act Section 3(a)(10) unless an exception or exclusion applies.

For its part, the CFTC might take the position that stablecoins are “swaps” under Commodity Exchange Act Section 1(a)(47)(A). That provision defines swap to include an “option of any kind that is for the purchase or sale, or based on the value, of 1 or more interest or other rates, currencies, commodities, or other financial or economic interests or property of any kind.”

Under that definition, the CFTC might characterize stablecoins as options for the purchase of, or based on the value of, fiat currencies.

Of course, individuals and companies dealing with stablecoins will have good arguments as to why the “demand note” and “swap” classifications shouldn’t apply. For example, issuers could invoke the Reves court’s “family resemblance” test for demand notes, or challenge the CFTC’s jurisdiction over retail foreign currency options, depending on the circumstances. The regulators, however, may take a different view.

What could this mean for stablecoins?

If stablecoins are classified as regulated securities or swaps, there could be serious consequences for a large segment of the crypto industry. For example, stablecoin issuers might have to register their offerings and comply with all the ensuing regulatory requirements. Similarly, a company or fund that conducts or facilitates stablecoin transactions might have to register as a broker-dealer.

Plus, the SEC and CFTC aren’t the only regulators that may take an interest in stablecoins.

Only time will tell how other state and federal entities, such as the New York Department of Financial Services (NYDFS) or the Financial Crimes Enforcement Network (FinCEN), will approach the regulation of stablecoins, particularly if they’re used to evade trade sanctions or other transaction reporting obligations.

For now, it’s clear that anyone who issues or uses stablecoins should give considerable thought to their potential risk under U.S. securities and commodities laws.

U.S. Capitol building image via Shutterstock

Posted on

New Proposed ETF Would Encompass Bitcoin Futures Alongside Sovereign Debt Instruments

Reality Shares ETF Trust has filed a proposal for an exchange-traded-fund (ETF) that would invest in a portfolio which includes both sovereign debt instruments and Bitcoin futures.

Reality Shares ETF Trust — a unit of crypto-focused fintech firm Blockforce Capital — has filed a proposal for an exchange-traded-fund (ETF) that would invest in a portfolio which includes both sovereign debt instruments and Bitcoin (BTC) futures.The ETF filing was submitted to the United States Securities and Exchange Commission (SEC) Feb 11.

ETFs are securities that track a basket of assets proportionately represented in the fund’s shares. They are seen by some as a potential ‘holy grail’ that would herald the widespread adoption of cryptocurrencies as a regulated and passive investment instrument.

The proposed fund, to be listed on NYSE Arca, is designed to “provide investment exposure to global currencies, both fiat and virtual currencies, that have been widely adopted for use (e.g., as store-of-value, international remittance, foreign-exchange trading) throughout the world.”

In regard to BTC futures, the fund would initially — if successful — invest via a wholly owned Cayman Islands-registered subsidiary in the cash-settled BTC futures that are currently traded on CBOE Futures Exchange (CFE) and the Chicago Mercantile Exchange (CME).

The filing notes that CFE and CME BTC futures positions will thus be valued “at their respective futures cash settlement values as published […] at the close of each trading day.” It also proposes that the fund may evolve to invest in BTC futures that are traded on other exchanges in the future, but emphasizes that the fund “will not invest directly in [B]itcoin.” The filing adds:

“The Fund may gain most of its exposure to Bitcoin Futures through its investment in the Subsidiary, which invests in Bitcoin Futures. To the extent the Fund invests in such instruments directly, it will seek to restrict its income from such instruments to a maximum of 10 percent of its gross income […] to comply with certain qualifying income tests necessary for the Fund to qualify as a regulated investment company.”

In addition to Bitcoin futures, the proposed fund will also allocate larger investments to more traditional “high-quality, short-term sovereign debt instruments listed for trading on U.S. exchanges and denominated in U.S. dollar, euro, British pounds sterling, Japanese yen and Swiss francs.”

As previously reported, a separate Bitcoin-related ETF by investment firm VanEck and financial services company SolidX — for listing on CBOE’s BZX Equity Exchange — is currently making a circuitous route through various filings with the SEC.

With multiple actors — including the Winklevoss twins — either failing or continuing to await the SEC’s approval of their BTC-related ETFs, crypto entrepreneur and CNBC analyst Brian Kelly has recently claimed there is “no shot” for a crypto ETF to get the regulatory greenlight in 2019.