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‘Crypto Assets Are Here to Stay,’ Says EU Commission Vice President

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European Commission

The European Commission, the executive body that proposes legislation for the EU, will this year conclude a regulatory assessment for the governance of crypto assets, because they are “here to stay,” a high-level has official said.

Speaking at a press conference after a meeting of the Economic and Financial Affairs Council last Friday, Valdis Dombrovskis, vice president of the European Commission, said member states are supportive of moves to chart regulations governing the cryptocurrency industry in the economic region. Dombrovskis said:

“We also had a good exchange of views on crypto-assets. We see that crypto-assets are here to stay. Despite the recent turbulence, this market continues to grow.”

Further, he suggested that initial coin offerings (ICOs) have the potential to become a viable form of alternative financing. “Already last year, ICOs helped raise over $6 billion in funding and this year this figure will be substantially bigger,” he said.

To make the most of this potential, Dombrovskis said the challenge right now is how to “categorize and classify” crypto assets and whether the EU should use existing financial market rules or create a set of dedicated regulations for cryptocurrencies.

“In this context, we are currently working together with European Supervisory Authorities on what we call regulatory mapping of crypto assets to answer exactly these questions,” he said. “This will provide a solid ground to build on and to decide on further steps in this area.”

Dombrovskis has previously made positive remarks on ICOs as an innovative fundraising method, as reported by CoinDesk in February. He indicated at the time that regulators would take more of a case-by-case approach to govern specific token projects, although he conceded more work would need to be done by the commission.

And he isn’t the lone ICO-friendly lawmaker in the EU. Last Friday, a Member of the European Parliament suggested a new rule governing ICOs that would place an upper cap on token sale proceeds, but would also make eligible projects accessible across EU member states.

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ICOs Continue to Raise Money via SEC Back Door

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The number of initial coin offerings getting through the back door at the Securities and Exchange Commission skyrocketed last year, as the securities regulator sent mixed messages about the future of investment contracts based on digital assets.

MarketWatch counted 287 ICO-related fundraisings accepted by the SEC with a total stated value of $8.7 billion in 2018, peaking at 99 in the second quarter. That’s a significant increase from 44 fundraisings filed with a total stated value of $2.1 billion in 2017.

ICO promoters gained access to accredited investors through a back door called Form D, as first reported by MarketWatch in February of last year.

Form Ds are notices filed by a company for an offering that is exempt from full SEC registration requirements. The key criteria for the Form D exemption is that only “accredited investors,” that is, individuals that have a net worth of over $1 million, or that have consistently made over $200,000 per year in income, or companies that have over $5 million in assets, can invest. Companies don’t have to file the Form D before the offering takes place, but instead within 15 days after the first sale of securities in the offering.

MarketWatch searched the SEC’s Edgar database for mentions of words including “coin,” “ICO,” “token,” “initial coin offering” and “saft.” The SEC has been taking steps to warn investors and limit the number of scams from initial coin offerings. Chairman Jay Clayton repeatedly reassured markets in 2018 that no ICOs were “registered” by the SEC.

In May, the SEC’s Office of Investor Education and Advocacy’s tried to capture investors’ attention by setting up a mock ICO website using a bogus coin offering to educate investors about scam red flags. The SEC called it HoweyCoins.com, after the SEC v. Howey, the Supreme Court’s test for whether a transaction qualifies as an “investment contract” and is therefore regulated by the SEC.

In November, the SEC settled its first cases imposing civil penalties solely for ICO securities offering registration violations. The SEC had charged two companies that sold digital tokens in ICOs in 2017 — Airfox, a Boston-based startup that raised $15 million and Paragon, an online entity that raised approximately $12 million — without registering the tokens as securities or filing periodic reports with the SEC.

Later that month, the SEC brought their first cases over touting violations for initial coin offerings, charging boxer Floyd Mayweather Jr. and music producer DJ Khaled.

Based on MarketWatch’s analysis, the SEC’s actions may have helped to slightly staunch the demand for more offerings. But the public statements and speeches of SEC officials belied a reluctance to close the door completely on digital assets and the investment contracts based on crypto-concepts.

SEC commissioner Hester Peirce is a crypto booster, industry advocates say. They’ve nicknamed her “Crypto Mom” after remarks in dissent of a decision by the SEC to reject the application from Cameron and Tyler Winklevoss for a bitcoin-backed exchange-traded fund.

In a speech via video to the Crypto Valley Summit in Zug, Switzerland on Nov. 7 she acknowledged that U.S. regulators are “admittedly sending mixed messages” because they are “coming to terms with crypto in different ways” and not always coordinating with each other.

“For example, our sister regulator, the Commodity Futures Trading Commission, has allowed the development of crypto-derivatives markets, but the SEC so far has not approved any application to list an exchange-traded product based on cryptocurrencies or crypto-derivatives trade on U.S. exchanges,” she told the audience.

Peirce said, “regulators have an unfortunate habit of allowing their own conservatism and their legitimate fear that they will be blamed when investments go wrong to curtail investors’ options.” She favors a different approach, one that “allows investors—informed by good information about the relevant exchange-traded product and encouraged to exercise a healthy dose of skepticism—to choose whether or not to buy the product. I am working on convincing my colleagues.”

In April Coindesk.com reported that Clayton told a Princeton University audience he rejected the idea that all ICOs are fraudulent, even though in February, in he said that he believes “every ICO” he’s seen qualifies as a security. Clayton opened the talk by saying he believes that “distributed ledger technology has incredible promise for the financial industry.”

On Dec. 6, Clayton told an audience at Columbia University, “I believe that ICOs can be effective ways for entrepreneurs and others to raise capital,” Clayton said, while also warning that “the novel technological nature of an ICO does not change the fundamental point that, when a security is being offered, our securities laws must be followed.”

These ICOs could potentially become available to retail investors and consumers, who are supposed to be protected from scams by SEC, as a result of the growth of secondary markets for the crypto-tokens that were created by these ICOs.

Several cryptocurrency-related firms are pursuing alternative trading systems or ATS licenses with the objective of providing trading platforms for ICO tokens and other cryptocurrencies. The SEC regulates these trading platforms, which trade securities listed on national exchanges but are not registered as exchanges themselves.

Coinbase acquired three firms, one of which — Venovate Marketplace — is registered as an ATS. Overstock already had an ATS from a previous acquisition. One of its subsidiaries, tZero, is using it to build a security token exchange.

Spokespersons at the SEC and CFTC did not respond to requests for comment due to the government shutdown.

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Hong Kong regulators say IPOs by cryptocurrency businesses are premature, putting Bitmain’s US$3 billion fundraising plan in peril

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Hong Kong

Hong Kong’s stock market regulator and operator have signalled their reluctance to give their green light to an initial public offering (IPO) by the world’s largest assembler of cryptocurrency mining equipment, while a regulatory framework is still being drafted to ring-fence the disruptive technology.

It is premature for any cryptocurrency trading platform – or business associated with the industry – to raise funds through an IPO in Hong Kong before the proper regulatory framework is in place, according to two sources familiar with the matter, speaking to the South China Morning Post on condition of anonymity.

The reluctance by the regulator and market operator, which provide policy advice to the Listing Committee of the Hong Kong stock exchange (HKEX), could be an insurmountable hurdle in the US$3 billion IPO application by Bitmain Technologies, the world’s largest maker of cryptocurrency mining computers.

Hong Kong’s listing rules provide for a closed-door hearing before the Listing Committee, which gives the final approval or rejection within six months of an application, after all questions are answered. If the applicant fails to hear from the Listing Committee after the six-month period, the listing lapses.

A spokeswoman at the HKEX said the market operator could not speak about individual cases. China International Capital Corporation (CICC), the sponsor of Bitmain’s IPO, declined to comment. Bitmain’s spokesman declined to comment.

A rejection for Bitman’s fundraising would be another blow to the nascent industry that now finds itself hemmed in by an increasing number of regulatory hurdles, as central banks and other financial regulators worldwide seek to exert control over the disruptive technological phenomenon.

Founded in 2013, Bitmain is the largest assembler of the data-hungry computers used for mining cryptocurrencies, and operator of mining collectives.

Its explosive growth from start-up to unicorn – a company exceeding US$1 billion in value – traced the 15-fold surge in bitcoin’s value in 2017, which created a demand boom for Bitmain’s Antminer computers.

The size of conventional servers, Antminers are filled with dozens or hundreds of high-powered computer chips known as ASICs that crunch the data needed to verify cryptocurrency transactions. Their cheapest configuration starts from US$200 in Hong Kong, going up to several thousand dollars.

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GSR Capital Engages tZERO to Develop Commodity Contract Token

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Overstock.com, Inc. and its subsidiary tZERO Group, Inc., the global leader in blockchain innovation for capital markets, announced that Hong Kong-based private equity firm GSR Capital has retained tZERO to develop a smart contract token that will be utilized for an upcoming sale of cobalt. Subject to compliance with applicable regulatory requirements, the sale is expected to offer recurring tranches of electric vehicle (EV) battery-grade cobalt, with up to $200 million of the material projected to be available for sale in 2019, with more planned for 2020.

tZERO and GSR Capital intend to build an ecosystem in Asia for tokenized commodity purchase contracts that would simplify the process of identifying, purchasing and tracking the supply of rare minerals. The companies also envision adding a security token trading platform in the region, subject to compliance with applicable regulatory requirements.

To accommodate an additional key partner in that project, the companies will be extending the deadline to finalize their previously-announced equity investment until Feb. 28, 2019. More information on the previously announced equity transaction can be found in a letter to investors in the Form 8-K filed by Overstock on December 17, 2018, which can be found on the company’s Investor Relations page.

“GSR Capital and our partners are pushing forward with our plans to create a first-of-its-kind cobalt offering in 2019,” said GSR Capital’s Chairman and Founder, Sonny Wu. “We are proud to partner with tZERO for this token offering and believe that their leadership in this space will benefit our shared global outreach. GSR and our partner will be doing more than just cobalt tokenization, and we see further growth in our partnership with tZERO including consummating an investment directly by next quarter.”

“We are excited to work with GSR and their partner on this innovative cobalt token offering,” said Overstock CEO and tZERO Executive Chairman, Patrick M. Byrne. “Smart contract automation of these transactions will significantly reduce overall costs while effectively improving transparency in rare earth metals purchases throughout the supply chain process. We look forward to bringing the future of commodities purchasing to the global marketplace.”

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Hong Kong to Tighten Cryptocurrency Rules

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Kristoffer Inton

Hong Kong is set to tighten regulations on cryptocurrencies, with plans to put exchanges, traders and other related companies under the oversight of the Securities and Futures Commission.

With less stringent rules on digital currencies than mainland China, where all crypto-related commercial activities are effectively banned, Hong Kong has become a thriving market for initial coin offerings. But growing concerns over fraud and money laundering have prompted the regulator into action.

According to the SFC’s guidelines, investment funds will be required to obtain a license if more than 10% of the assets they manage are made up of bitcoin or other cryptocurrencies, and will be allowed to sell related products only to professional investors.

Under the voluntary scheme, exchanges will be able to test virtual currency products or services temporarily in a “regulatory sandbox” before deciding on whether to seek a license.

The proposed regulations, which are to be implemented in stages, will also mean that companies can only issue ICOs for tokens that fulfilled SFC’s requirements. For instance, the tokens must have existed for at least 12 months.

In February, the SFC sent warning letters to seven local exchanges after receiving complaints from investors claiming they had been unable to withdraw fiat or cryptocurrencies from their accounts. Certain exchanges were accused of misappropriating assets or manipulating the market.

In March, the commission ordered Black Cell Technology to halt its ICO and charged the company with conducting unauthorized promotional activities.

Hong Kong’s actions reflect a growing trend. The Group of 20 leading economies is considering ways to regulate virtual currency assets as part of the global fight against money laundering.

As a financial center closely linked to mainland China, Hong Kong is taking steps in the right direction with measures like requiring identity verification for transactions, said Daisuke Yasaku of the Daiwa Institute of Research.

But the “cost of regulations will be high,” he warned.

Depending on the design of its platforms, an exchange can be required to report frequently to the authority and subject to rigorous inspections and monitoring, Yasaku pointed out.

“The requirements of the SFC initiative may prove too burdensome for some operators”, said Timothy Loh, who manages a law firm in the territory. Some will decide not to join the new framework in order to maintain their current shares in the market.

Some argue that higher trading costs also risk discouraging institutional investors from entering the market, dampening hopes that their presence will help stabilize it. The counter argument is that tighter regulations may lead to greater investor confidence over the long run.

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Cryptoassets Should be “Outlawed” – Allianz GI CEO

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The head of one of Europe’s largest asset managers has called for global regulators to ban cryptoassets, scorning them for wiping out people’s savings.

After a spectacular boom in 2017, cryptocurrencies have fallen to earth this year. The best known one, Bitcoin, has lost three-quarters of its value while Ripple and Ethereum, the second and third biggest cryptocurrencies, have both slumped nearly 90 percent.

“You should outlaw it”, Allianz Global Investors Chief Executive Andreas Utermann said during a panel discussion in London on Tuesday.

“I am personally surprised that regulators haven’t stepped in harder.”

Utermann made the comments sitting next to Andrew Bailey, the head of Britain’s Financial Conduct Authority. Bailey responded saying “that’s quite strong actually!” before adding there was “no intrinsic value” in cryptoassets.

“We are watching that very closely.” Authorities also had crypto coin offerings (ICOs), which firms have used as an alternative way to raise funding, under surveillence too, Bailey said.

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STO Business Essentially an Illegal Financial Activity in China

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The People’s Bank of China officially banned security token offering (STO) businesses on Saturday, in another blow to digital currencies in mainland China. An STO is an initial coin offering (ICO) backed by tangibles such as assets, or profit or revenue of a company. An ICO is fundraising activity that allows digital currency start-ups to raise funds through the creation and sale of digital “tokens”.

Pan Gongsheng, a deputy governor of the People’s Bank of China, the country’s central bank, told an internet finance forum in Beijing that “illegal” financing activities through STOs and ICOs were still rampant in the mainland despite a nationwide clean-up of the cryptocurrency market last year.

“The STO business that has surfaced recently is still essentially an illegal financial activity in China,” he told the forum, according to state-owned China Central Television. “Virtual money has become an accomplice to all kinds of illegal and criminal activities.”

In what amounts to a top financial official acknowledging the ban on ICOs and STOs for the first time, Pan said most of the financing operations conducted through ICOs in China were suspected of being illegal fundraising, pyramid sales schemes and other financial fraud.

Beijing launched a crackdown on ICOs in September last year, ordering all platforms to halt digital currency issuance immediately. Before the crackdown, 80 per cent of the world’s virtual currency transactions and ICO financing took place in mainland China.

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Fundraising Through an IEO Instead of an ICO?

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A Blockchain Powered Remittance Platform – REMIIT – completes its IEO through the South Korean cryptocurrency exchange Coinis, raising approximately $2.3 Million over two days.

IEO is an abbreviation of “Initial Exchange Offering” which is a method of fundraising for blockchain businesses where the cryptocurrency of the project conducts fundraising being directly listed on the exchange. The key element to an IEO is to partner with an exchange (or multiple exchanges) to function as the distributor of tokens. Project developers mint the tokens and conduct the sales directly through the exchange, which will then sell the tokens to individual contributors for the corresponding pair.

REMIIT that completed their IEO last November is a blockchain powered remittance platform that builds on Ethereum with the Cosmos Chain as a side chain to enhance the transaction capacity and reduce costs. In the current monopolized remittance industry, REMIIT brings an alternative solution that resolves not only the issues in the banking sector but also the problems that exist in the blockchain remittance businesses. With the REMIIT Smart Contract (RSC) that can be activated with their stable coin REMD at its core, it is expected to minimize the number of intermediaries involved for a faster and cheaper overseas money transfer experience.

After the project launch through the IEO, REMIIT’s CEO Stevie An spoke, “REMIIT has many competitors in the industry but there still remains a large amount of market share available for blockchain remittance” and that “REMIIT will capitalize on the previous remittance business experience to speed up the blockchain implementation in our everyday lives.”

With the support of the REMIIT project from South Korea, it has demonstrated great potential for the possibilities to grow further in the global sector. Despite the difficulties that may lie ahead, REMIIT stands at the forefront to bring adoption of blockchain technology to our everyday lives.

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Startup to File Constitutional Appeal Against ICO Ban

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A blockchain startup will file a constitutional appeal against the Korean government’s ban on initial coin offerings (ICOs). Presto said Thursday that it would appeal the Constitutional Court, alleging that banning all types of ICOs is against the rule of law and the principle of proportionality, thereby violating basic rights

Presto has been in the spotlight by claiming to apply DAICO, an alternative to ICOs, for the first time in Korea. DAICO, a portmanteau of Decentralized Autonomous Organization (DAO) and ICO, enables investors to use a smart contract to decide on executing funds or getting their money back, resulting in embezzlement or scams being reduced significantly.

“As a blockchain startup, we have been hitting a snag as the government and the National Assembly have done nothing over the last one year since the government’s blanket ban on ICOs,” said Presto CEO and founder Kang Kyung-won, adding that “we will ask the court to rule on the ICO ban and the legislature’s nonfeasance.”

The Korean government formed a virtual currency task force consisting of government agencies including the Ministry of Strategy and Finance and the Financial Services Commission in September last year and banned all types of ICOs including security-type ones. However, there have been no laws and guidelines governing ICOs since then.

Presto contends that the ICO ban is the execution of governmental authority that infringes upon — without legal grounds — people’s freedom of occupation and property and equal rights and scientists’ basic rights. “In this era of the Fourth Industrial Revolution and unbounded competition, one year or two in the science and technology community is comparable to 100 years in the past Industrial Revolution.

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ICOs Offload ETH and Downsize to Survive

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Having belatedly realized that the crypto market may have further to drop, and that staying all in ETH could be fatal, tokenized projects have begun cashing out and cutting costs. Some, such as Aragon, have shown prudence in their treasury management, maximizing capital through smart cryptocurrency acquisition and liquidation. This week, the project sold $1.5 million of cryptocurrency, including $1 million of ETH, and has sought sanctuary from market volatility by taking out a 1 million loan of DAI, Maker’s ETH-collateralized stablecoin.

Other tokenized projects have not been so fortunate or astute at balancing their budgets however. In addition to Aragon, over 100,000 in ETH has been sold by ICOs in the past week in a belated attempt to stem diminishing funds. A number of projects have also begun to lay off staff, including Steemit, which is shedding 70 percent of its workforce. In a blog post, Steemit CEO Ned Scott attributed the move to “the weakness of the cryptocurrency market, the fiat returns on our automated selling of STEEM diminishing, and the growing costs of running full Steem nodes.” He added:

I would like to thank all of our employees and contractors for their months and years of dedication and hard work. It is incredibly difficult to part with these great people who I have gotten to know well and respect.

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Rules for Cryptocurrency Exchanges, ICO in Force by Q1 of 2019

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The regulations for digital asset or cryptocurrency exchanges and ICOs will come into force by first quarter of 2019, says Finance Minister Lim Guan Eng. He said on Wednesday the Securities Commission (SC) had given him an update that the regulations would be part of the SC’s efforts to facilitate alternative fundraising avenues and new investment asset classes.

“While some parties might still be sceptical of this space, there can be no doubt that we need appropriate regulations to be put in place and enforced to safeguard the interest of investors,” he said, when delivering the keynote address at the FinTech Conference 2018 organised by the SC.

He also reiterated his statement in Parliament that interested parties must work within the framework set up by Bank Negara Malaysia and the SC.

“Both Bank Negara and the SC, in terms of formulating this framework will be under the auspices of the Finance Ministry. The Finance Ministry will lead the committee comprising of Bank Negara, the SC, and the MOF itself,” it said.

Lim also said as part of the government’s commitment to support high potential and innovative MSMEs, “we are keen on the continued development of such alternative financing avenues for these businesses beyond the traditional channels of financing”.

The government had provided allocation for a co-investment fund for equity crowdfunding (ECF) and peer-to-peer financing (P2P) platforms.

The Co-Investment Fund (CIF) worth RM50mil will match investments from private investors on a one to four basis, that is. RM1 from government and RM4 from private funds.

This mechanism leverages on the collective wisdom of the crowd, instead of a bank’s investment committee or the committee of a fund administered by the government, to support MSMEs which have gained validation from private investors.

“Through this, we hope to be able achieve faster fund disbursements to support a broader range of deserving MSMEs, as well as provide greater transparency to how public funding are being utilised,” it said.

The CIF will operate under a commercial mandate toward eventually becoming self-sustaining through its investment returns, with earnings channelled back to finance more ECF and P2P campaigns.

“If successful, the CIF would be self-replenishing and will not be reliant on new funds from the government in the future, thereby helping alleviate some of our fiscal burden.

“It is my wish that this fund will provide a boost for our ECF and P2P industry, as well as putting down a challenge for our operators – demonstrate your effectiveness as platforms to fund Malaysia’s innovative SMEs, and the government will channel more of SME funds through these market-based financing platforms, as part of further democratising financing for SMEs.

“The final details of the fund are being worked out by the SC and the CIF should be operationalised by early next year,” it said.

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