SEC Issues Statement on Digital Asset Custody, Approves First Reg A+ Token Offerings
By: Robert A. Musiala Jr.
This week the U.S. Securities and Exchange Commission (SEC) and the U.S. Financial Industry Regulatory Authority (FINRA) issued a “Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities.” Among other things, the statement highlights the importance of the Customer Protection Rule, which “… 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.” The statement provides details on the issues faced by broker-dealers seeking to trade in blockchain-based assets. According to the statement, “[t]he specific circumstances where a broker-dealer could custody digital asset securities in a manner that the Staffs believe would comply with the Customer Protection Rule remain under discussion, and the Staffs stand ready to continue to engage with entities pursuing this line of business.” The statement also provides examples of noncustodial broker-dealer activities that would not implicate the Customer Protection Rule.
In other news from the SEC, this week the first two blockchain token offerings in U.S. history were approved under the SEC’s Regulation A+ registration exemption. Two blockchain startups, Blockstack and Props, were qualified by the SEC under Reg A+ and will be allowed to sell their “Stack” and “Props” tokens, respectively, to nonaccredited investors, within certain limits. Another recent approval of note was received by ErisX, which just before the July Fourth holiday was granted a derivatives clearing organization license by the Commodity Futures Trading Commission. Along with these new approvals, venture capital remains a strong source of support for the blockchain industry, with a recent report finding that blockchain startups have raised $822 million in 279 separate venture capital deals in the first half of 2019.
Overseas, the U.K. Financial Conduct Authority (FCA) recently proposed new rules that would ban the sale of “crypto-derivatives” to retail consumers. In a press release, the FCA noted concerns related to market abuse, financial crimes, price volatility and a lack of a reliable valuation basis. Around the same time, the FCA approved the first “cryptocurrency hedge fund” as a “full-scope Alternative Investment Fund Manager.” And in more news from the U.K., one of the world’s largest insurance brokers and a major international charity organization announced a project with a tech startup to deploy a blockchain-based platform for delivering “micro-insurance” to smallholder farmers in Sri Lanka.
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More Pilots Emerge for Food Supply Chain and Academic Records, Cargo Solutions Gain Momentum
By: Simone O. Otenaike
A leading company in the door-to-door sale and distribution of frozen foods to consumers recently announced plans to implement a multinational professional services firm’s blockchain solution. The solution will reportedly allow the company’s customers to use their smartphones to scan a QR code on the packaging and review the products’ details for each step of the supply chain from harvest to point of sale. The company intends to pilot the solution with fillets of Northern cod and artichoke heart wedges. Separately, one of the largest food companies in the world also recently announced plans to implement a blockchain solution that would allow consumers to ascertain and certify sourcing facts and product quality. A blockchain solution for the honey supply chain is also reportedly in the works. An American multinational computer technology firm announced plans to partner with the World Bee Project to launch a “BeeMark” label that will designate honey that comes from verifiable organic and sustainable sources. The partnership also will implement data science and install monitoring systems inside beehives to monitor environmental factors and track bee behavior to research population decline. According to a study published this week, the global blockchain supply chain market is expected to reach over $9 billion by 2025.
Two major ocean carriers have announced plans to join the blockchain-enabled digital shipping platform TradeLens. With these additions, the scope of the platform reportedly extends to more than half of the world’s ocean container cargo and supports five of the world’s six largest carriers. According to reports, TradeLens replaces peer-to-peer paper-based exchanges with a platform that enables participants to digitally connect, share information and collaborate across the shipping supply chain ecosystem. Also last week, a major Dutch bank, the Port of Rotterdam and a South Korean-based global technology firm successfully completed the first paperless and fully door-to-door tracked shipments with the blockchain-based DELIVER platform. According to the press release, DELIVER aims to integrate container tracking and the documentation of financial transactions through a secure and paperless logistics process.
A multinational professional services firm recently announced plans to extend its current Health Outcomes Assessment platform with a U.K.-based digital health company and an Amsterdam-based software security company. The platform reportedly provides a blockchain solution for outcomes-based contracting, an emerging concept that purportedly leads to fairer reimbursement and access to novel treatments for patients. Also in recent news, one of the largest public research institutions in the U.S. announced plans to use blockchain for academic record data sharing. The solution seeks to solve the pain point of interoperability of academic records across institutions and would allow participating institutions to securely exchange and verify academic credentials.
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US and International Regulatory Oversight of Cryptocurrency Poised for Expansion
By: Brian P. Bartish
Noting serious privacy, money laundering, consumer protection and financial stability concerns, U.S. Federal Reserve Chairman Jerome Powell announced plans for a working group that will track the forthcoming cryptocurrency Libra. Despite uncertainty regarding the Fed’s authority over the project, Powell’s comments that the project “cannot go forward” until such concerns are addressed were followed by a decrease in the price of bitcoin (2.4% lower) and a slight hit to the share price of the social networking company spearheading Libra’s development (although the price recovered shortly thereafter).
A recently disclosed IRS presentation detailed new tactics, including potential Grand Jury subpoenas of leading software providers, that the agency may employ to obtain user records to aid the agency’s efforts to identify criminal tax activity involving cryptocurrency. The disclosure comes amid calls for greater transparency regarding the IRS’s treatment of cryptocurrency, as Congressman Tom Emmer reintroduced legislation to prohibit penalties on owners of “forked” digital assets until the IRS issues guidance on reporting requirements for those assets. A “fork” event is when one blockchain is split into two, resulting in two separate digital assets (such as bitcoin and bitcoin cash).
Internationally, Canada published updates to its anti-money laundering rules this week that will require Canadian and foreign cryptocurrency platforms to register as money services businesses with the Financial Transactions and Report Analysis Centre of Canada and implement full anti-money laundering and countering terrorist financing compliance programs. Canada’s action is part of what Ciphertrace is predicting to be a significant wave of international cryptocurrency regulation aimed at combating a range of cryptocurrency-related crimes and threats, including exchange thefts, fraud and exit scams, which totaled more than $1.2 billion in 2019 Q1 alone. A recent analysis by Chainalysis determined that bitcoin’s use in illegal online marketplaces is set for a record year of more than $1 billion; however, the proportion of bitcoin transactions for illicit purchases, such as drugs or child pornography, appears to be declining.
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