Biz Builder Mike

You can't sail Today's boat on Yesterdays wind - Michael Noel

Rapper T.I.’s associates to cough up $100K in FLiK token case with SEC

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Three associates of Clifford Joseph Harris Jr., a rapper also known as T.I. who was responsible for helping launch the FLiK token, have agreed to pay more than $100,000 after a U.S. district court approving a settlement.

According to records filed Nov. 17 in the U.S. District Court for the Northern District of Georgia, Chance White, Owen Smith, and William Sparks Jr. will pay $102,992 in a settlement covering penalties, fees, and disgorgements for their role in selling tokens in initial coin offerings, or ICOs, for FLiK and CoinSpark. T.I., a rapper, singer, and songwriter, has won three Grammy Awards and had several hit singles including Whatever You Like and Live Your Life.

The SEC announced charges against the three in September along with Ryan Felton, founder of video production company AVA, and T.I., alleging that the ICOs were “unregistered and fraudulent.” Sparks, who is T.I.’s social media manager, was charged with violating registration provisions by allegedly selling FLiK tokens on the rapper’s social media accounts.

White and Smith, who are both involved in the Atlanta film industry, were charged with violating registration and anti-touting provisions for allegedly promoting CoinSpark without revealing they were being paid for their endorsement of the token.

The trio agreed to settlements at that time, which were approved by the court on Tuesday. The SEC’s case against Felton is reportedly still ongoing, while the commission ordered T.I. to pay a $75,000 penalty and not participate in offerings or sales of digital-asset securities for at least five years.

FLiK was one of many tokens announced during the 2017 ICO boom. When the token was launched that September, Felton claimed on social media that FLiK would see “tremendous growth in one year” and be redeemable for $14.99 in 15 months. However, the price of the token only reached $0.21 at its peak on Oct. 17 and is currently being traded at $0.000289 according to data from CoinMarketCap.

In 2018, a group of 25 investors named Felton and T.I. in a class-action lawsuit accusing them of running a pump-and-dump scheme with FLiK by hyping up the token using misleading information and celebrity endorsements.

The group’s legal team later amended the lawsuit to include comedian Kevin Hart for his alleged role. A U.S. district judge dismissed the suit against T.I. earlier this year, stating he found no concrete evidence of securities violations or negligent misrepresentation regarding the rapper touting FLiK.

Rapper T.I.’s associates to cough up $100K in FLiK token case with SEC

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Crypto derivatives volume more than triples spot trading

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The digital asset industry as a whole looks significantly different than it did three years ago. A Wild West-esque year, 2017 boasted astronomical asset price increases and booming fundraises amid underdeveloped regulation. Some elements of 2017, such as initial coin offerings, have largely died off. Other niches, such as derivatives trading, have since experienced watershed growth, as noted in a recent report from United States crypto exchange, Kraken. 

“Beginning with pioneers like Crypto Facilities, BitMEX, Deribit, BitVC (now HuobiDM), and OKCoin (now OKEx), deriviatives trading in crypto markets really took hold in 2017, dovetailing the entrance of traditional incumbents like the CME and CBOE,” Kraken’s November report,  “The Tail Wags the Dog: An Evolution of Bitcoin Futures,” said. 

The report found that “Derivatives are now at least 4.6x the size of spot volume, and we believe the trend will likely continue.” Spot Bitcoin (BTC) is actual BTC, bought and sold at the going market rate, transferrable off exchanges. Derivatives are trading products on exchanges. They essentially act as bets on the future price of Bitcoin. 

Demand for crypto derivatives has flourished in recent years. Capitalizing on the trend, platforms such as BitMEX have grown, new players such as Bybit have surfaced, and existing exchanges such as Binance have added their own derivatives products.

The Chicago Mercantile Exchange, or CME, added Bitcoin futures in 2017, subsequently adding Bitcoin options trading in 2020. The Chicago Board Options Exchange, or CBOE, also opened BTC futures in 2017, although the entity closed said product in 2019. 

“The growth in derivatives volumes is stark in contrast with that of spot volumes,” Kraken’s report detailed. Spot crypto trading has declined since the height of the industry’s last euphoric bull market, while derivatives trading has taken the spotlight:

“From 2Q2017 to 1Q2018, spot volume rose sharply from a low of roughly $58B to a high of $570B, before dropping off significantly to a low of $104B nearly two years later. Since then, derivatives have completely replaced spot as the dominant market, while spot volumes have failed to make a full recovery. Derivatives notional volume exploded from below $6B in 2Q2017 to over $1.7T by 3Q2020.”

As far as growth rationale is concerned, Kraken believes that leverage plays a part. Derivatives traders can essentially borrow large sums of capital for trades, based on the amount they hold in their accounts.

Although derivatives have boomed since 2017, regulation is catching up; most crypto derivatives platforms have banned U.S. customers in recent years. U.S. authorities also went after BitMEX for alleged regulatory violations. 

Crypto derivatives volume more than triples spot trading

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SEC Commissioner Hester Peirce Comes to the Defense of Unikrn and ICO Settlement

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Earlier today, the Securities and Exchange Commission (SEC) announced a settlement with Unikrn, a digital asset issuer that was deemed to have transgressed securities law in the offering of an unregistered security via an initial coin offering (ICO). Unikrn agreed to pay a $6.1 million penalty while effectively shutting down operations and retiring issued tokens. Unikrn settled without admitting or denying the SEC’s findings.

In the aftermath of the announcement, SEC Commissioner Hester Peirce, a well-known proponent of Fintech innovation, criticized the SECs decision to pursue such a settlement without any allegations of fraud. Commissioner Peirce pointed to the destruction of the company as the outcome of the settlement, stating:

“… the Commission is effectively forcing the company to cease operations because of an allegedly improper offering of supposed securities.”

While recognizing the transgression, Commissioner Peirce warned the SEC was stifling innovation and accompanying  economic growth with its heavy-handed approach to the emerging area of digital assets.

Commissioner Peirce has proposed a regulatory “safe harbor” for digital assets in a move to allow more clarity in the offering of digital assets.

Commissioner Peirce’s Statement is republished below.

Today’s settlement with Unikrn, Inc., is the latest in a growing line of enforcement actions arising from initial coin offerings.[1] While many SEC enforcement actions in this space include allegations of fraud, Unikrn falls within the narrower category of token issuers charged only with violating Section 5 of the Securities Act.[2] In other words, Unikrn is alleged to have offered and sold its tokens in an unregistered offering and in a manner that did not qualify for an exemption; it is not alleged to have engaged in any fraud in doing so. Registration violations, even standing alone, are serious, and our enforcement actions can serve to deter such violations and protect harmed investors. We should strive to avoid enforcement actions and sanctions, however, that enervate innovation and stifle the economic growth that innovation brings. I believe that this action and its accompanying sanctions will have such consequences.

The settlement requires Unikrn to permanently disable its blockchain-based token, which it had integrated into its product offerings, and pay a penalty of $6.1 million, which represents substantially all of the company’s assets. In other words, the Commission is effectively forcing the company to cease operations because of an allegedly improper offering of supposed securities.[3]

While I do not concur in my colleagues’ opinion that Unikrn’s token offering constituted a securities offering, I recognize that the determination of whether an instrument is offered and sold as a security in the form of an investment contract requires a subjective weighing of the facts and circumstances. Such analysis, idiosyncratic by its very nature, does not produce clear guideposts for entrepreneurs and others to follow. The challenge of discerning a clear legal line is especially difficult with respect to new forms of business and novel technologies. Entrepreneurs may be forced to choose between unpalatable options: expending their limited capital on costly legal consultation and compliance or forgoing their pursuit of innovation due to fear of becoming subject to an enforcement action. A regulatory safe harbor could resolve this unhappy dilemma.

As I proposed earlier this year,[4] a well-designed, narrowly tailored regulatory safe harbor would efficiently and effectively combine the Commission’s interest in protecting investors with developers’ ambition to experiment. Affording a company like Unikrn a three-year regulatory window within which to further develop and refine its platform—while still subjecting it to the antifraud laws—would provide benefits to token purchasers, token issuers, and the Commission.

Imagine if such a regulatory safe harbor had been available to Unikrn. Instead of permanently disabling its tokens as a result of today’s settled enforcement action, Unikrn, in concert with its tokenholders, might be devoting its time and resources to identifying new uses for the token and expanding its user base. Although some may not see the loss of the benefits of innovation as large in this specific instance, posterity will feel the cumulative loss to society of innovation forgone because of such actions. Indeed, we will never know the full magnitude of such losses because some would-be entrepreneurs, having seen one too many Unikrns, may decide it wiser to shelve their most transformative ideas.

By failing to challenge ourselves to experiment with new approaches to regulation, we, and those whose interests we are pledged to serve, risk surrendering the fruits of innovation. I respectfully dissent from the Commission’s actions today relating to Unikrn.

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