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Feb 19 2021

Southeast Asia’s Funding Societies, an Online Capital Formation Platform, Reports S$2 Billion in Business Financing Disbursals

Southeast Asia-based Funding Societies, a digital financing platform, has revealed that it has made S$2 billion (appr. $1.5 billion) in disbursals of business financing to SMEs across the region as the company enters its sixth year of offering loans.

Funding Societies’ management noted that the amount is partly crowdfunded by more than 200,000 retail investors on its platform and has been disbursed through 3.7 million+ different loans.

Funding Societies reported S$ 850 million (appr. $640 million) in disbursals last year, meanwhile, its platform default rate managed to stay below 2% during the COVID-19 pandemic.

In an effort to reduce its portfolio risk during 2020, Funding Societies had tightened up its credit underwriting criteria so that only quality notes would get crowdfunded. The platform also focused on companies that were likely to do well during the pandemic.

These high-performing industries include healthcare, medical supplies, transportation, among several others. Funding Societies reported an 18% growth in platform investors since January 2020.

Big Four auditing firm Ernst & Young’s 2020 ASEAN SME Transformation Survey has revealed that 68% of the surveyed 1,200 SMEs across the six major ASEAN nations (Singapore, Indonesia, Malaysia, Thailand, the Philippines, and Vietnam) are open to doing business with non-traditional lending platforms.

Non-traditional lenders may be appealing because of their greater speed and convenience. Small and medium-sized enterprises may prefer the faster and more flexible loan approval process and the digital know-your-customer (KYC) processes, which usually don’t require asset security or visiting physical bank locations.

At present, there’s an annual trade financing gap of approximately $150 billion in Asia, according to estimates provided by the Asian Development Bank. Around 60% of firms have had their applications rejected when applying for trade financing, the bank noted, while pointing out that these businesses did not proceed with the trade due to the lack of funding.

Kelvin Teo, Co-founder and Group CEO of Funding Societies, stated:

“We’re thrilled to reach this major milestone before we even realised it. It is a momentous occasion and encouragement for us. There is much more to do, as we continue to serve the needs of SMEs and Investors in the region. We’re grateful to raise Series C funding last year, enabling us to further help SMEs even amidst uncertain times.”

As reported earlier this month, Singapore based Funding Societies had announced the expansion of operations into Thailand. The online capital formation platform will operate under a crowdfunding license authorized by the Thai Securities and Exchange Commission.

According to a note from Funding Societies, the company worked for more than a year with regulators to set up operations in the country.

Funding Societies currently operates in Singapore, Indonesia, and Malaysia. Thailand will be the fourth country where the marketplace will operate in its six years of activity. Funding Societies notes that it is the only SME digital financing platform in Southeast Asia to be licensed in four countries.

Source

Written by bizbuildermike · Categorized: Crowdfunding · Tagged: 2020, asean, Asia, Bank, business, Businesses, ceo, Co-founder, company, covid-19, Crowdfunding, digital, digital financing, exchange, expansion, funding, funding societies, healthcare, Indonesia, Investment Platforms and Marketplaces, kelvin teo, KYC, lending, linkedin, Malaysia, milestone, more, note, online capital formation, pandemic, Philippines, platforms, portfolio, retail, retail investors, risk, securities, Securities and Exchange Commission, security, series c, Singapore, small businesses, smbs, SMEs, Southeast Asia, survey, Thailand, the philippines, trade, transportation, us, vietnam

Feb 18 2021

Blockchain Platform Qtum Teams Up with Blockpass to Provide On-Chain KYC Services

Blockchain platforms Qtum and Blockpass have teamed up in order to deliver on-chain (or blockchain-based) Know-Your-Customer (KYC) services.

As part of the agreement, Qtum will be providing subsidies to “specific” members looking to achieve regulatory compliance through Blockpass’s On-chain KYC solutions.

Adam Vaziri, CEO at Blockpass, stated:

“We’ve known and been fans of the Qtum team and network for a long time, and it’s great to have the opportunity to work closely with them. The Qtum network is innovative, and we’re excited to be able to bring the benefits and possibilities of On-chain KYC to developers and users alike. Facilitating fast, simple and efficient regulatory compliance on Qtum creates more opportunities for everyone, and spreads the phenomenon of On-chain KYC to an even wider audience.”

Qtum Co-founder Jordan Earls noted that on-chain KYC will become a vital component for many different protocols on the decentralized web or Web 3.0. He added that instead of hindering or inhibiting innovators who are focused on complying with regulations while enabling new technologies, the Qtum Foundation would “like to support those builders by backing Blockpass’ expansion to the Qtum blockchain.”

Earls added:

“Blockpass’ solution has exceeded our expectations when it comes to cost, which is an order of magnitude cheaper than traditional services, and its ability to only allow non-sensitive pieces of information to touch the blockchain.”

Qtum is an open-source, public (or permissionless) blockchain or distributed ledger technology (DLT) platform that aims to leverage the security of unspent transaction outputs (UTXOs) along with Ethereum Virtual Machine (EVM) smart contracts.

Secured by a proof-of-stake consensus mechanism, Qtum has introduced its own Decentralized Governance Protocol (DGP) that allows specific blockchain or DLT settings to be modified, “leading to the possibility of increasing Qtum’s block size without the need for a hard fork” or backwards incompatible upgrade.

Blockpass is a digital identity verification provider that aims to offer a “one-click” compliance gateway to financial services and other regulated sectors. Through the Blockpass platform, users are able to create, store, and manage a “data-secure” digital identity that may be used for a complete ecosystem of services, token purchases and to also gain access to “regulated industries.”

Blockpass is reportedly offering a 90% discount on its services in order to support clients during the COVID-19 pandemic.

Blockpass, which claims to be a pioneer of On-chain KYC, is a “fast, comprehensive” KYC and AML screening software-as-a-service for blockchains, crypto, DeFi and other regulated sectors.  The platform offers various compliance benefits such as “pay-as-you-go,” no setup costs, no integration required, free-of-cost testing, and “immediate launch” services.

Source

Written by bizbuildermike · Categorized: Crowdfunding · Tagged: adam vaziri, AML, blockchain, Blockchain & Digital Assets, blockchains, blockpass, ceo, Co-founder, compliance, covid-19, crypto, decentralized, defi, digital, digital identity, distributed ledger technology, dlt, ethereum, expansion, financial services, General News, identity, identity verification, information, integration, jordan earls, know your customer, KYC, Ledger, more, other, pandemic, platforms, pos, Proof-of-Stake, qtum, Regtech & Legaltech, screening, security, smart contracts, Teams, Technology, token, transaction, verification, virtual machine, work

Feb 04 2021

Justin Mart, Ryan Yi from Coinbase take a Closer Look at Ethereum, DeFi Growth, Also Review OCC, FinCEN Developments

Digital asset exchange Coinbase recently published its Around the Block #11: “A snapshot of decentralized finance (DeFi) and two sides of the crypto regulatory spectrum” (report), which aims to cover important issues in the crypto and blockchain industry.

In this latest edition, released on February 3, 2021, Justin Mart and Ryan Yi take a close look at the current state of DeFi and the evolving digital currency regulatory space.

During the current crypto bull market, DeFi has “continued its strong rise,” the report confirmed. It pointed out that starting in the summer of last year, DeFi initiatives experienced dramatic growth in Total Value Locked or TVL (as tracked by DeFi Pulse and many other sites).

Coinbase’s report noted that DeFi’s meteoric rise is still “spurred” by the yield farming phenomenon. According to the US-based exchange, this includes “a virtuous cycle: Yield farming mechanics induce participants to add capital → which increases TVL → which drives governance token valuations → which increases yield farming subsidies → which continues the cycle.”

As stated in the report:

“Nevertheless, true zero-to-one innovations in DeFi cannot be discounted as part of the growth story. These are things like synthetic assets (e.g. Synthetix, UMA, and Mirror), increased capital efficiency in financial products (e.g. Aave, Compound), open financial access (including flash loans and emerging remittance use cases), and composable protocols that layer DeFi projects together like Yearn.”

Total Value Locked in DeFi protocols (TVL) currently stands at over $32B at the time of writing, a remarkable 2700% growth year-over-year. Meanwhile, the number of DeFi users has grown to exceed 1.2M, as “defined by the number of unique addresses accessing DeFi services,” the report revealed. It also noted that mainstream protocols such as Uniswap and Compound now claim around 200–500K users, with “most other DeFi apps between 25–50K users.”

DEX (or decentralized / non-custodial crypto exchange) volume has also maintained its steady growth since July 2020. Total DEX volume has “surpassed most centralized exchanges, topping $10B per day in January 2021,” the report confirmed. It also mentioned that volume has been “driven by growth in DeFi, but also tailwinds from broader crypto bull markets and sustained traction in categories where DEXs enjoy competitive advantages.” These include “access to the long-tail of novel DeFi tokens; and efficient swaps between highly correlated assets (e.g. stablecoins),” the report added.

But DEXs today settle trades on the Ethereum mainnet, and are subject to “oppressive” gas prices during periods of increased activity. This “drives continued interest in scaling solutions, with a notable milestone as Synthetix has launched on Optimism (a rollup-based scaling solution),” the report added.

The report further noted:

“DeFi is moving too quickly for any single person to keep track.”

But some major themes include:

  • DeFi projects are embracing composability: New DeFi projects “either introduce new primitives, or bundle existing primitives to create net new products.” Think of these primitives “as lego bricks, 6 months ago we were designing and building single bricks.” Today we are “combining these bricks into cars, planes, and castles.”
  • Composability is “extending into DeFi versions of partnerships: DeFi projects are wrestling with key questions around moats, defensibility, and top-line growth.” Most projects seem to “embrace open community collaboration, believing communities create moats (you cannot fork a community).” This exact vision “initially led to the governance token and yield farming phenomenon, and today is evolving into creative partnerships and collaborations, most notable in Sushiswap’s 2021 roadmap.”
  • Scalability is “becoming a bottleneck, but solutions are coming: As the base Ethereum chain struggles under scale, several protocols are openly exploring integrations with Layer-2 networks or other blockchains.” Look for “significant progress in 2021, especially in Ethereum rollups.”
  • Regulatory uncertainty impacts development: “In tandem, the SEC lawsuit against Ripple and CFTC lawsuit against BitMEX demonstrate that regulatory bodies are paying close attention to crypto, and not afraid to charge the largest players in the space.” It’s reasonable to “expect increased attention on DeFi based projects, and this uncertainty continues to impact feature development in regulated jurisdictions.”

During the last quarter, FinCEN and the OCC have introduced several crypto regulatory policies, the report from Coinbase noted. While both are under the purview of the US Treasury Department, the guidance appears to be on “the opposite ends of the spectrum toward crypto friendliness,” Coinbase claims.

They explained that FinCEN is responsible for ensuring that companies follow applicable KYC/AML regulations, which are really important for digital currency exchanges (or VASPs — virtual asset service providers) such as Gemini, Kraken, Coinbase, among others. Digital asset exchanges must verify their users’ identities (KYC) and use blockchain or DLT forensic tools to examine digital currency transactions to ensure deposits don’t come from illicit sources.

FinCEN has proposed an amendment to the Bank Secrecy Act’s FBAR regulations, which is specific to cryptocurrencies or VASPs. The new amendment will require US residents to report their cryptoc-asset holdings and transfers valued at more than $10,000 regardless of where these assets are being held.

The amendment could require US citizens to report crypto holdings in excess of $10,000 that are maintained in overseas accounts, and also require exchanges or digital wallets to store client details related to any transfer valued at more than $3,000, and also report these details to FinCEN for any transfers valued at over $10,000.

The public notice only had a 15-day comment period over the recent US holiday break, which made it quite challenging for VASPs to respond properly.

Many crypto firms (Coinbase, Fidelity, Square, CoinCenter, ErisX, among others) have issued strong responses which have noted that the suggested rules may create issues. These companies or organizations have also criticized the rushed nature of the proposal. Since then, the US Treasury decided to extend the comment period, but the future still “remains unclear given the new administration,” Coinbase claims.

The Office of the Comptroller of the Currency (OCC), an independent bureau in the Treasury which is responsible for assisting with the “charter, regulation, and supervising banks,”  appears to have “come out on the other end of the spectrum with recent guidance,” Coinbase stated in its report.

  • Federal Banks are allowed to operate public blockchain infrastructure (January 2021]
  • Federal Banks are permitted to engage in stablecoins (September 2020)
  • Federal Banks are allowed to custody crypto-assets (July 2020)

Coinbase added:

“It’s clear that national banks may now participate in the crypto economy through custody and settlement. Notably, Jan 2021 guidance which legitimizes public blockchains as settlement infrastructure, placing blockchains on par with ACH or SWIFT. … federal banks can serve as large validators on blockchains (e.g. miners), or more practically, banks may ultimately settle transactions on Bitcoin, Ethereum, or through stablecoins.”

The exchange further noted:

“This is the first step in regulatory action required to bridge the crypto economy into traditional financial infrastructure. … while the OCC is the federal regulator, it is not the only regulator. There will be an interplay between the interpretation of this guidance from the state vs federal level.”

The report concluded:

“Separately, adoption will take time — blockchains are still relatively new and lack some core features (e.g. privacy, scalability), but this is a promising development. To their credit the Treasury has since extended the comment period, and the proposal potentially hangs in limbo with the incoming Biden administration.”

Source

Written by bizbuildermike · Categorized: Crowdfunding · Tagged: 2020, 2021, Aave, Adoption, Apps, Banks, Biden, bitcoin, BITMEX, blockchain, Blockchain & Digital Assets, blockchains, Bull Market, cars, cftc, coinbase, Community, Compound, Cover, crypto, Crypto Holdings, crypto-assets, cryptocurrencies, Currency, custody, decentralized, decentralized finance, defensibility, defi, DEX, digital, digital asset, digital asssets, digital currency, digital wallets, distributed ledger technology, dlt, economy, ethereum, exchange, Exchanges, Federal Banks, Fidelity, finance, financial infrastructure, FinCEN, Fork, Future, gemini, Global, html, identities, Infrastructure, innovations, Kraken, KYC, KYC/AML, lawsuit, linkedin, Mainnet, market, markets, milestone, miners, more, occ, Office of the Comptroller of the Currency (OCC), other, Politics, Legal & Regulation, Privacy, Products, Regulation, report, research, Research Report, ripple, scaling, SEC, Space, square, stablecoins, step, story, synthetix, token, tokens, Traction, Transactions, transfers, uniswap, United States, us, vasps, virtual asset service providers, Wallets, Yearn

Jan 09 2021

Blockchain Security Firm CipherTrace Clarifies how Virtual Asset Service Providers, Money Service Businesses are Categorized by Regulators

Blockchain security firm CipherTrace recently explained and discussed the differences between virtual asset service providers (VASPs), money service businesses (MSB), money transmitters, digital asset customers, and how they impact crypto-related compliance measures.

CipherTrace noted that cryptocurrency, digital assets, convertible virtual currency, and other terms seem to all describe the same or similar concepts. The blockchain firm pointed out that a cryptocurrency exchange may also be called a Virtual Asset Service Provider (VASP), Virtual Asset Entity, Digital Asset Customer (DACs), Money Service Business (MSB), or other names “depending on the context.”

Although some industry professionals might be inclined or prefer to refer to all these entities related to digital assets as VASPs—the same way they refer to all virtual assets as “crypto”—there are certain “differentiators between the different Digital Asset Entity typologies that affect how that entity is regulated,” CipherTrace explained.

As noted by CipherTrace:

“A Digital Asset Entity is an umbrella term for a range of businesses built on cryptocurrency transactions.” 

Digital Asset Entities may include Virtual Asset Service Providers (VASPs) like digital currency exchanges and ATMs, which are considered financial institutions or service providers “in their own right, in addition to gambling sites, incubators, and other entities that use crypto but are not always classed as financial institutions,” CipherTrace clarified. The blockchain company also mentioned that alternative names might include Virtual Asset Entity and Crypto Asset Entity.

CipherTrace further noted:

“A Digital Asset Customer is any Digital Asset Entity that uses the services of a bank or other formal financial institution. DAC was first used to describe a broad grouping of cryptocurrency-based customers in the US Department of the Treasury’s OCC enforcement action against M.Y. Safra Bank in early 2020.”

On January 30, 2020 the Office of the Comptroller of the Currency (OCC) reportedly issued the very first crypto-related enforcement action against a US-based bank—M.Y. Safra Bank (MYSB), which is located in New York City. As confirmed by CipherTrace, the enforcement action involved a cease and desist order that was focused on deficient or inadequate anti-money laundering (AML) measures for compliance and monitoring of the institution’s digital asset customers (DAC). As explained by CipherTrace, these entities included virtual currency exchanges, Bitcoin ATM operators, and virtual (over-the-counter) OTCs, along with other crypto-related companies

CipherTrace also mentioned that when a crypto-asset entity engages in various financial activities with digital assets, AML/CFT and other requirements might apply to it “for the entity’s role as a money transmitter.” These crypto-asset entities may be called Virtual Asset Service Providers (VASPs) or money transmitters “engaged in convertible virtual currency, depending on the regulatory or policy making body.”

The Financial Action Task Force (FATF) notes that VASPs are companies or businesses which carry out at least one of following functions or actions on behalf of their customers:

  • exchange between virtual assets and fiat currencies;
  • exchange between one or more forms of virtual assets;
  • transfer of virtual assets;
  • safekeeping and/or administration or virtual assets or instruments enabling control over virtual assets;
  • participating in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset;

This definition “encompasses a range of crypto businesses, including exchanges, ATM operators, wallet custodians, and hedge funds,” CipherTrace confirmed. It added that the FATF suggests that VASPs be “subject to the same stringent AML/CTF and KYC requirements as traditional financial institutions.”

(Note: for more details on these concepts and terminology, check here.)

Source

Written by bizbuildermike · Categorized: Crowdfunding · Tagged: 2020, AML, bitcoin, blockchain, Blockchain & Digital Assets, blockchain security, business, Businesses, cft, CipherTrace, company, crypto, crypto asset, crypto-assets, cryptocurrency, Cryptocurrency Exchange, Currencies, Currency, digital, digital asset, digital assets, Digital Currencies, digital currency, distributed ledger technologyd, dlt, enforcement, exchange, Exchanges, financial services, Gambling, Hedge Funds, KYC, money, more, New York, new york city, note, Office of the Comptroller of the Currency (OCC), other, Politics, Legal & Regulation, security, Transactions, us, vasps, virtual asset service providers, virtual assets, virtual currencies, virtual currency, wallet

Dec 27 2020

SEC vs. Ripple: A predictable but undesirable development

The U.S. Securities and Exchange Commission has not been kind to crypto in the past year. In March 2020, in the SEC v. Telegram case, the Commission won a worldwide injunction against the proposed issuance of Grams by Telegram, undoing years of innovative work even in the absence of any allegations of fraud. Then, on the last day of September 2020, Judge Alvin K. Hellerstein dashed the hopes of Kik Interactive by ruling in favor of the SEC’s motion for summary judgment in SEC v. Kik Interactive, halting the sale of Kin crypto tokens. Both of these actions were filed in the Southern District of New York. On Dec. 22, 2020, the SEC decided that it was time to initiate another high-profile action, filing in the same district against Ripple Labs and its initial and current CEOs, Christian Larsen and Bradly Garlinghouse, respectively, for raising more than $1.38 billion through the sale of XRP since 2013.

The initial fallout from this action has been swift and severe: 24 hours after the lawsuit was filed, the price of XRP was down almost 25%. This still left XRP ranked fourth on CoinMarketCap, with a total market capitalization of over $10.5 billion.

The complaint

In its complaint, the Commission paints a straightforward pattern of sales of XRP that were never registered with the SEC or made pursuant to any exemption from registration. From the perspective of the Commission, this amounts to a sustained practice of illegal sales of unregistered, non-exempt securities under Section 5 of the Securities Act of 1933.

For readers not familiar with legal procedure, it might seem unusual for the case to be brought in a New York federal court, especially since Ripple is headquartered in California, and both named individuals reside there. However, Ripple has an office in the Southern District of that state, some statements were made by Garlinghouse while he was present in New York, and significant sales of XRP were made to New York residents. In legal parlance, this would make venues in the Southern District of New York appropriate.

In addition, it might be surprising to some that both Larsen and Garlinghouse were named personally in an action that seeks primarily to recover for XRP allegedly sold illegally by Ripple, through its wholly-owned subsidiary, XRP II LLC. They are named both because they individually also sold significant volumes of XRP — 1.7 billion by Larsen and 321 million by Garlinghouse — and because the SEC contends they “aided and abetted” Ripple in its sales.

Aiding and abetting is a cause of action that depends on a primary violation by a third party, in which the aider and abettor voluntarily and knowingly participates with the goal of assisting in the venture’s success. In this case, Ripple would be the primary violator, and both Larsen and Garlinghouse are alleged to have substantially participated in the pattern of Ripple’s XRP sales, with the goal of allowing the company to raise funds without registering XRP under the federal securities laws or complying with any available exemption from registration.

The bulk of the complaint provides an overview of digital assets, details the SEC’s version of the history of Ripple and its marketing efforts with regard to XRP, illustrates how in the opinion of the Commission, XRP satisfies the elements of the Howey investment contract test under the federal securities laws, and seeks to demonstrate how Larsen and Garlinghouse participated in the on-going sales efforts.

In addition to disgorgement of all “ill-gotten gains,” the requested order would permanently ban the named defendants from ever selling unregistered XRP or participating in any way in the sale of unregistered, non-exempt securities. It would also prohibit them from participating in the offering of any digital asset securities, and it seeks unspecified civil monetary penalties.

A brief history of Ripple and XRP

The idea behind the current XRP dates back to late 2011 or early 2012, before the company changed its name to Ripple. The XRP Ledger, or software code, operates as a peer-to-peer database, spread across a network of computers that records data about transactions, among other things. In order to achieve consensus, each server on the network evaluates proposed transactions from a subset of nodes it trusts not to defraud it. Those trusted nodes are known as the server’s unique node list, or UNL. Although each server defines its own trusted nodes, the XRP Ledger requires a high degree of overlap between the trusted nodes chosen by each server. To facilitate this overlap, Ripple publishes a proposed UNL.

Upon the completion of the XRP Ledger in December 2012, and as its code was being deployed to the servers that would run it, a fixed supply of 100 billion XRP was set and created at little cost. Of those XRP, 80 billion were transferred to Ripple and the remaining 20 billion XRP went to a group of founders, including Larsen. At this point in time, Ripple and its founders controlled 100% of XRP.

Note that these choices represent a compromise between the fully decentralized, peer-to-peer network that was envisioned when Bitcoin (BTC) was first announced and a fully centralized network with a single trusted intermediary such as a conventional financial institution. In addition, Bitcoin was never designed or intended to be held or controlled by a single entity. In contrast, all XRP was originally issued to the company that created it and that company’s founders. This hybrid approach to a blockchain-based digital asset and more conventional assets created and controlled by a single entity led some crypto enthusiasts to complain that XRP was not a “true” cryptocurrency at all.

According to the SEC’s complaint, from 2013 through 2014, Ripple and Larsen made efforts to create a market for XRP by having Ripple distribute approximately 12.5 billion XRP through bounty programs that paid programmers compensation for reporting problems in the XRP Ledger’s code. As part of these calculated steps, Ripple distributed small amounts of XRP — typically between 100 and 1,000 XRP per transaction — to anonymous developers and others to establish a trading market for XRP.

Ripple then began more systematic efforts to increase speculative demand and trading volume for XRP. Starting in at least 2015, Ripple decided that it would seek to make XRP a “universal [digital] asset” for banks and other financial institutions to effect money transfers. According to the SEC, this meant that Ripple needed to create an active, liquid XRP secondary trading market. It, therefore, expanded its efforts to develop a use for XRP while increasing sales of XRP into the market.

At about this time, Ripple Labs, and its subsidiary, XRP II LLC, came under investigation by the U.S. Financial Crimes Enforcement Network, or FinCEN, acting pursuant to its mandates in the Bank Secrecy Act, or BSA. Acting in conjunction with the U.S. Attorney’s Office for the Northern District of California, the two companies were charged with failing to comply with various BSA requirements, including failure to register with FinCEN and failure to implement and maintain proper Anti-Money Laundering and Know Your Customer protocols. According to FinCEN, Ripple’s failure to comply with these FinCEN requirements was facilitating the use of XRP by money launderers and terrorists.

This action did not proceed to trial, with Ripple Labs settling the charges by agreeing to pay a $700,000 fine and further agreeing to take immediate remedial steps to bring the companies into compliance with BSA requirements. The settlement was announced by FinCEN on May 5, 2015. The major contention of FinCEN throughout its investigation was that XRP was a digital currency. Ripple acceded to this position and has since worked to comply with BSA requirements.

At the same time, as noted in the SEC’s complaint, from 2014 through the third quarter of 2020, the company sold at least 8.8 billion XRP in the market and institutional sales, raising approximately $1.38 billion to fund its operations. In addition, the complaint asserts that from 2015 through at least March 2020, while Larsen was an affiliate of Ripple as its CEO and later chairman of the board, Larsen and his wife sold over 1.7 billion XRP to public investors in the market. Larsen and his wife netted at least $450 million from those sales. From April 2017 through December 2019, while an affiliate of Ripple as CEO, Garlinghouse sold over 321 million XRP he had received from Ripple to public investors in the market, generating approximately $150 million from those sales.

XRP is not like Bitcoin or Ether

The preceding description paints a picture of a digital asset that is widely held by persons scattered around the globe. In the case of both Bitcoin and Ether (ETH), this kind of decentralization was apparently enough to convince the SEC that those two digital assets should not be regulated as securities. As Director Bill Hinman of the SEC’s Division of Corporation Finance explained in June of 2018:

“If the network on which the token or coin is to function is sufficiently decentralized — where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts — the assets may not represent an investment contract. Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful. […] The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception. Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value.”

This kind of analysis does not really work for XRP, most of which continues to be owned by the company that created it, where the company continues to have significant influence over which nodes will serve as trusted validators for transactions, and where the company continues to play a significant role in the profitability and viability of the asset. Part of that role will now, of course, involve responding to this latest SEC initiative.

The court’s probable reaction

Unfortunately for Ripple and its former and current CEOs, the SEC has a strong case that XRP fits within the Howey investment contract test. Derived from the 1946 Supreme Court decision in SEC v. W. J. Howey, this test holds that you have bought a security if you: (1) make an investment (2) of money or something else of value, (3) in a common enterprise, (4) with the expectation of profits, (5) from the essential managerial efforts of others. Most of the purchasers of XRP, or certainly a very large number of them, would appear to fit within each of these categories.

Ripple raised more than $1.38 billion from the sale of XRP, so it is abundantly clear that purchasers were paying something of value. Moreover, as there was no effort to limit purchasers to the amount of XRP that they might reasonably “use” for anything other than investment purposes, that element appears likely to be present as well. The fact that the fortunes of all the investors rise and fall together along with the value of XRP in the marketplace should satisfy the commonality requirement.

The complaint highlights a number of things that Ripple has done to promote profitability, including statements that it has made, all of which suggest that a reason for purchasing XRP is the potential for appreciation. The limited functionality of XRP in comparison to its trading supply is another reason to believe that most purchasers were buying for investment, seeking to make a profit.

Finally, the significant on-going involvement and role of the company, especially given its huge continuing ownership interest in XRP, means that there is a strong case to be made that the profitability of XRP is highly dependent on the efforts of Ripple. All of this points to the reality that, under the Howey Test, XRP is likely to be a security.

Ripple’s response to the SEC’s action

Ripple’s response to the SEC’s enforcement action came even before the SEC’s complaint was officially filed. On Dec. 21, Garlinghouse tweeted out a condemnation of the SEC’s planned action, criticizing the agency for picking favorites and trying to “limit US innovation in the crypto industry to BTC and ETH.” Soon after, Ripple’s general counsel, Stuart Alderoty, gave a strong indication of how the company was likely to respond in the pending matter by pointing out the 2015 FinCEN issue, which he claimed was a government determination that XRP was a digital currency rather than a security under the Howey Test.

Unfortunately, classification as a digital currency does not necessarily preclude regulation as a security. As another New York district court decided in the 2018 case of CFTC v. McDonnell, in the context of the Commodity Futures Trading Commission’s authority to regulate digital assets, “Federal agencies may have concurrent or overlapping jurisdiction over a particular issue or area.”

Thus, even though FinCEN regulates crypto as a digital asset, the CFTC may treat it as a commodity; the SEC may regulate it as a security; and the Internal Revenue Service may tax it as property. All at the same time.

Conclusion

This comment should not be taken as approval of the SEC’s current approach and relative hostility to crypto offerings. As the SEC’s complaint notes, the XRP sales that are now being questioned took place over many years. The initial sales date back to 2013, which had happened considerably before the SEC first publicly announced its position that digital assets should be regulated as securities if they fit within the Howey investment contract analysis, which did not come until 2017 with The DAO Report. Moreover, since 2015, Ripple has been proceeding in accordance with the settlement reached with FinCEN. Since that time, Ripple has worked to bring its operations into compliance with BSA requirements, operating as if XRP is a currency rather than a security.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Carol Goforth is a university professor and the Clayton N. little professor of law at the University of Arkansas (Fayetteville) School of Law.

The opinions expressed are the author’s alone and do not necessarily reflect the views of the University or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

SEC vs. Ripple: A predictable but undesirable development

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