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SEC Seeks $5.3B Judgment Against Terraform Labs and Do Kwon

The United States Securities and Exchange Commission (SEC) has initiated legal proceedings against Terraform Labs and its co-founder, Do Kwon, by submitting a demand for the company to pay civil fines and disgorgement in the amount of billions of dollars. The SEC has filed a petition in response to a judgement in a civil matter, and the purpose of the move is to hold Terraform Labs and Kwon responsible for the alleged violations they have committed.

Disgorgement and Civil Penalties: The Securities and Exchange Commission (SEC) has demanded that Terraform Labs and Kwon pay roughly $4.7 billion in disgorgement and prejudgment interest. Disgorgement is the process of repaying earnings that were obtained by dishonest means, while prejudgment interest is a kind of compensation for the time worth of money. Moreover, the Securities and Exchange Commission is requesting a total of $520 million in civil penalties, with Terraform Labs being responsible for $420 million and Kwon being responsible for $100 million.

possible Solutions: Terraform Labs and Kwon have both submitted their briefs in the civil case, in which they propose several possible solutions to the problem. In their proposal, Terraform Labs suggested a maximum civil penalty of $3.5 million, whereas Kwon suggested a penalty of $800,000. The SEC’s proposed sums are much higher than these estimates, which are substantially lower.

The Securities and Exchange Commission (SEC) is contemplating the imposition of further measures to deter future breaches, in addition to the disgorgement and civil penalties that have already been imposed. The Securities and Exchange Commission has requested that Kwon be prohibited from acting as an officer or director of a securities company. In addition, the Securities and Exchange Commission is attempting to get a “conduct-based injunction” in order to guarantee that Terraform Labs and Kwon would not commit breaches of a similar kind in the future.

The importance of SEC enforcement is shown by the fact that the SEC has filed a request for disgorgement and civil penalties against Terraform Labs and Do Kwon. This action demonstrates the regulatory agency’s dedication to safeguarding investors and prosecuting those who violate securities laws. By ensuring that both people and businesses are held responsible for their activities, the Securities and Exchange Commission (SEC) strives to preserve the integrity of the financial markets and to encourage fair practices.

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US SEC and FINRA Issued Latest Custody Guidance on Digital Assets Securities

The United States Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) issued a statement addressing regulatory issues regarding the custody of digital asset securities on 8 July.

The recent statement highlighted that any entity involved in the transactions with digital asset securities must register with the SEC as a broker-dealer, and broker-dealers are required to “safeguard customer assets and to keep customer assets separate from the firm’s assets” under the Customer Protection Rule.

It was noted that some broker-dealers engage in digital asset securities without custody functions. Such noncustodial activities do not raise the same level of concern as long as the activities are compliant with relevant securities laws, SRO rules, and other legal and regulatory requirements. An example of a non-custodial activity is a digital wallet, where an issuer settles the transaction between the buyer and the issuer. The broker-dealer only instructs the customer to pay the issuer directly and issuers to issue digital asset security to the customer directly.

The SEC recognized the custody of digital asset is exposed to fraud, theft, and the possibility of losing private keys. The regulators urged broker-dealer to comply with Rule 15c3-3, hold in possession, or control digital asset securities. Besides, regulators also raised concerns that the other party could have a copy of the private key and transfer the digital asset security without the consent of the broker-dealer. As a result, the broker-dealer might not be able to reverse or cancel mistaken or unauthorized transactions despite the private key is held by the custodian.

SEC Reschedules Decision-Making on Bitcoin ETF Proposals

The Securities and Exchange Commission (SEC) in the United States once again delayedon deciding on the three Bitcoin exchange-traded fund (ETF) proposals according to the release of documents from the regulatory agency on Monday.

The three ETFs proposed earlier in the year include Bitwise Asset Management, VanEck/Solid X and Wilshire Phoenix filed with exchanges NYSE Arca and Cboe BZX. The proposed ETFs aimed to be the first investment vehicles based on Bitcoin.

The next decision on Wilshire Phoenix is scheduled for September 29, while the final decisions of Bitwise and VanEck/SolidX are expected on October 13 and October 18 respectively.

The regulatory agency has been putting off making decisions on the Bitcoin ETFs, referring to the concerns of “fraudulent and manipulative acts and practices” in crypto trading.

Back in May of 2019, Dave Nadig of ETF.com mentioned, “it is clear the SEC is still in information gathering-mode.”

In an attempt to address these concerns, Bitwise published multiple reports indicating the actual Bitcoin market is much smaller, more regulated, and better surveilled than expected.

Bitwise previously commented that the bitcoin market is “significantly smaller and significantly more efficient” than observed.

Bitwise’s ETF proposal has received support from several influential blockchain leaders, including Spencer Bogart from Blockchain Capital, Matthew Walsh from Castle Island Ventures, Sam McIngvale of Coinbase Custody, and Kristin Smith from the Blockchain Association.

VanEck, SolidX to Sell ‘Limited’ Bitcoin ETF to Institutions

While the United States Securities and Exchange Commission (SEC) once again delayed the decision regarding the Bitcoin exchange-traded funds (ETFs), the investment management firms are planning to sell a “limited version” to institutional investors on Sep 5th.

VanEck and Solid X revealed that they have a workaround to bypass regulatory issues and are using an SEC exemption that will allow their product to be offered to institutions such as hedge funds and banks, but not to retail investors.

An “unusual” arrangement is under the SEC Rule 144A allows the sale of privately placed securities to “qualified institutional buyers,” as reported by the Wall Street Journal.

Although the product is not a true ETF, it is similar. Head of ETF product of Van Eck, Ed Lopez mentioned that the offering “allows for shares to be created and redeemed like ETFs, but it is not an ETF.”

“Unlike an ETF it isn’t listed on a national exchange, rather it is quoted on the OTC Link ATS platform. This is a first-of-its-kind type of offering. Given it will trade over-the-counter via broker-to-broker transactions, we’ve been casually referring to it as a Broker Traded Fund, a BTF.”

VanEck and SolidX believe that this limited version will act as evidence that Bitcoin ETF can work.

Heads of SEC, CFTC and FinCEN Jointly Warn Crypto Industry to Follow Regulations

The heads of the three major US financial regulators have issued a joint statement warning the cryptocurrency industry to adhere to banking regulations in the development of digital assets.

The joint statement was signed by Commodity Futures Trading Commission (CFTC) Chairman Heath Tarbert, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco and Securities and Exchange Commission (SEC) Chairman Jay Clayton. The statement reiterates that digital assets must comply with the various banking and financial services laws already in place in the US, regardless of what they call their cryptocurrencies or tokens—citing the Bank Secrecy Act (BSA) which outlines how financial services must be registered in compliance with regulators.

The details of the statement spoke to the nature of digital asset-related activities, explaining that the “activities a person engages in are a key factor in determining whether and how that person must register with the CFTC, FinCEN, or the SEC.”

The statement further highlights that an ‘exchange’ in a digital assets market may or may not qualify or be categorized as an ‘exchange’ in the federal securities market. Quoted from the joint statement, “Regardless of the label or terminology that market participants may use, or the level or type of technology employed, it is the facts and circumstances underlying an asset, activity or service, including its economic reality and use (whether intended or organically developed or repurposed), that determines the general categorization of an asset, the specific regulatory treatment of the activity involving the asset, and whether the persons involved are ‘financial institutions’ for purposes of the BSA.”

Comments from the SEC

In additional comments, Chairman Jay Clayton, Securities and Exchange Commission (SEC) spoke on the responsibilities of his department stating that “The statutory mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. In general, the SEC has jurisdiction over securities and securities-related conduct. Persons engaged in activities involving digital assets that are securities have registration or other statutory or regulatory obligations under the federal securities laws.” Clayton concluded, “Broker-dealers and mutual funds are required to implement reasonably-designed AML Programs and report suspicious activity These rules are not limited in their application to activities involving digital assets that are “securities” under the federal securities laws.”

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Telegram Maintains Gram is not a Security, Urges Court to Deny SEC Action

The United States Securities and Exchange Commission (SEC) seems set on making an example of Telegram, but the fight is far from over. Telegram has asked, in an October 16th filing, the United States of America’s district court for the Southern District of New York to deny the request by the SEC for a preliminary injunction on Gram, Telegram’s native cryptocurrency.

Telegram also urged the court to pass an order that maintains the status quo regarding the offer, sale, or distribution of Grams. In the response filing, Telegram cited the lack of compliance from the SEC into entering into any discussion and believes the SEC is trying to “steamroll Telegram into consenting to a preliminary injunction where there is no need.”

The Counter twist in claims

The move by Telegram to deny these sets of requests by the SEC is in response to a filing by the SEC on October 11, 2019. Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement said;

“Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold,” she further maintained “…that the defendants have failed to provide investors with information regarding Grams and Telegram’s business operations, financial condition, risk factors, and management that the securities laws require.”

Telegram has thus responded to this filing by maintaining the position that Gram, though owned by Telegram, is not a security and, as such, should not be subjected to regulations that would be clearly undue.

This investment row between the United States Securities and Exchange Commission and Telegram lies on the premise that Telegram did not register their Gram tokens as securities and based on clearly spelled exceptions governing the investments in securities which Telegram allegedly consented to, the commission is determined to prevent the sale of the tokens who are not licensed to partake in the unlisted security.

Telegram has maintained the position that Gram is merely a currency while telegram Telegram is not an ICO, the firm concluded that there is no need for the Court to enter a preliminary injunction in the filing as it is in compliance to delay the launch of the TON blockchain upon which the Gram currency is built.

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Paxos Launches Blockchain Settlement Platform Following No-Action Relief From SEC

Paxos Trust Company announced on Oct. 28 that it will go ahead with the launch of its blockchain-enabled Paxos Settlement Service and will begin processing transactions for certain listed U.S. equity securities after receiving ‘No-Action relief’ from the U.S. Securities and Exchange Commission (SEC).

The letter from the SEC clearly stated that, “the Staff would not recommend enforcement action to the Commission against Paxos” should they operate within the parameters they set out in their request for registration. While essentially giving Paxos the green light, the SEC’s letter also clearly stipulated that at this stage, “No more than seven (7) participants will be eligible to use the Paxos Settlement Service for clearance and settlement and the participants will be required to satisfy the criteria for participation.”

European banks Credit Suisse and Société Générale will be among the first to use the Paxos Settlement Service and will also be among the first to settle U.S. equities outside of the legacy infrastructure for the first time in 50 years. The innovative blockchain product will remove intermediaries and allow two parties to bilaterally settle securities trades directly with each other which will significantly reduce transaction fees and give permissioned-users access to capital that would historically be trapped in the legacy systems.

Taking the First Step

According to Charles Cascarilla, CEO and Co-Founder, Paxos, the U.S. equities business is facing unprecedented consolidation and economic pressure which requires comprehensive changes to the legacy structures. He sees the Paxos Settlement Service as an important first step in reimagining the post-trade structure.

He concluded the press release stating, Cascarilla added, “We look forward to working with our early adopter partners to further develop the ecosystem. Together, we’ll create financial benefits and achieve operational efficiencies with blockchain technology that will facilitate an open financial system. We’re starting with U.S. listed equities, but this technology can be scale to many asset classes across geographies and for all types of clients.”

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Harbor Becomes First Blockchain Company to Hold Both Transfer Agent License and Brokerage License

Harbor, a digital assets firm for security token issuance, has been granted a transfer agent license by the United States Securities and Exchange Commission (SEC).

On Thursday, Oct 31, Harbor CEO Joshua Stein announced to the Block that the SEC had granted their request for a transfer agent license which now makes Harbor the first security token platform to have both a transfer agent license and a broker-deal license.

With the transfer agent license Harbor will now have the ability to maintain records of security token ownership, keep track of account balances and pay our dividends to investors. Harbor plans to attract blockchain companies that are looking to conduct Regulation A+ offerings and to engage with these companies it is crucial they have a transfer agent license to comply with SEC regulations.

Regulation A+ funding was introduced in 2012 and is an alternative type of initial public offering aimed towards startups for preliminary funding.

Harbor had previously been granted a brokerage dealer license last September. According to Stein, holding both licenses enables Harbor to facilitate the complete life cycle of security token issuance as well as regulated trading. This combination will further increase Harbor’s appeal to companies that are looking to make security token offerings.

Stein said, “Think of the entire life cycle of this, there is… selling the investors into the investment, maintaining the investment while they are in, and controlling how they are traded. The broker-dealer is mostly involved in gaining the investors into the investment. The transfer agent maintains the records while they are in and pays out dividends, and the transfer agent controls when they pay out.”

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Grayscale Bitcoin Trust Files to Become First Fund to Report to SEC

Grayscale Bitcoin Trust (GBTC) has positioned itself to become the first cryptocurrency investment fund to achieve a reporting status to the United States Securities and Exchange Commission (SEC). Published in a blog on Nov.19, Grayscale announced that it had filed a Registration Statement on Form 10 with the SEC. The Trust clarified that it was not seeking recognition as an exchange traded fund (ETF) but did highlight what would change for its investors should the SEC approve the filing.

Pending Approval

Historically, it would make the Trust the first digital currency investment vehicle to achieve a reporting status with the SEC and to register its shares pursuant to the Exchange Act. Grayscale would also fall under the SEC’s auditing standards in this event which could have a positive effect on attracting further investment as institutional restrictions on investment will be eased. The Trust also highlighted the increased opportunity for liquidity among accredited investors stating, “Accredited investors who have previously purchased shares in the Trust’s private placement would have an earlier liquidity opportunity, as the statutory holding period of their private placement shares would be reduced from 12 to 6 months.”

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Thailand’s SEC to Eradicate Any Stumbling Blocks to Digital Asset Advancement

Asian nations are gearing towards incorporating digital assets into their economies as the world gets ready for the fourth industrial revolution or 4IR touted to be transformative. For instance, it is speculated that China is setting a precedent in blockchain adoption.

Thailand is also not wasting any time because it intends to open up the digital asset sector by amending the present regulations.

According to the Bangkok Post, the Securities and Exchange Commission (SEC) in Thailand has revealed plans to revise the royal decree on digital asset businesses in 2020 to boost digital assets’ growth, as well as shield investors from avoidable risks.

The secretary-general of the SEC, Ruenvadee Suwanmongkol, acknowledged that it would scrutinize whether the royal decree has any stumbling blocks to digital asset businesses.

She acknowledged: “Laws should not be outdated and should serve market needs, especially for new digital asset products, and be competitive with the global market. We need to explore any possible obstacles.”

The royal decree was effected in May 2018, and it listed four secondary business intermediaries, namely brokerage firms, dealers, crypto exchanges, and token portal service providers or ICO portals.

As specified by the SEC, the royal decree caters for digital tokens, cryptocurrencies, and any other electronic data unit.

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