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Future Proofing ICOs: ASIC Guidelines

 8 min read / 

South Korea joined China in banning ICOs, prohibiting domestic companies and start-ups from participating in them, despite South Korea seeing a recent surge in crypto activity, including domestic exchange Bithumb, exceeding a trading volume of 104,113 bitcoin, or $427m in recent days. Predicated on protecting the people from overt scams and the overly speculative nature of the investments, South Korea’s financial regulator has instigated an “intensive crackdown… with stern penalties,” for those who continue to participate in ICOs. Interestingly, such news comes a day after Australia’s Securities Regulator issued formal guidance for ICOs, providing some information on what needs to be included in an ICOs release information and how such procedures should be conducted.

Such information looks to whether the ICO could be considered managed investment scheme and indicates that ICO white papers are legally required not to issue misleading or deceptive statements. This should not be seen as an attempt to “regulate” ICOs, but simply as a means to initiate such a process, bringing legislation to the attention of companies and helping them understand their obligations.

By extending existing law to the new technology, Australia’s regulator is seeking to strike a balance between the cryptomarket and investors, without implementing a ban, as evidenced by the guidance document, “ASIC recognises that ICOs have the potential to make an important contribution to the options available to businesses to raise funds and to investment options available to investors. An ICO must be conducted in a manner that promotes investor trust and confidence, and complies with the relevant laws.”

Highlight: ASIC

Summarily, the guidance document outlines that tokens offered during the ICO may trigger particular licensing and disclosure requirements, such as those found under the Corporations Act, should the tokens represent financial products. Furthermore, additional consumer protections apply on the basis of the information contained within ICO materials, especially white papers, in that Australian consumer law prohibits misleading or deceptive conduct. Such measures call for greater care to be taken when using promotional materials so as to not deceive investors.

The Guidelines also outline indicators that will be considered in determining the nature of the token. Similar to the US’ Howey Test, the guidelines highlight that: “if the ICO involves investors contributing assets, including digital currency, in a common enterprise to obtain a financial benefit or interest in property but without those investors having day-to-day involvement in the operation of the common enterprise, then this may be classed as a managed investment scheme.” It is clear that the guidelines wanted to cast a broad net, as ASIC has also noted that the rights attaching to tokens are to be interpreted widely, so as to ensure that ICOs do fall within current legal climates.

“If the ICO involves investors contributing assets, including digital currency, in a common enterprise to obtain a financial benefit or interest in property but without those investors having day-to-day involvement in the operation of the common enterprise, then this may be classed as a managed investment scheme.”

It is clear that the guidelines wanted to cast a broad net, as ASIC has also noted that the rights attaching to tokens are to be interpreted widely, so as to ensure that ICOs do fall within current legal climates.

Lastly, ASIC has recommended that companies seeking to use ICOs do so under the guidance of the Innovation Hub’s informal assistance, generating some indication of ASIC’s willingness to engage with proposed coin offerors.

Old World Blues

Several criticisms can be made of the move to draw ICOs within the range of current legislation, including scrutinising old laws being applied to new innovations. However, it should be seen as a positive. Making companies aware that ICOs are not untouchable is the first step in a healthy regulation process. It is hoped that a lengthy consultation will take place with thought leaders in the cryptomarket.

However, ICOs have prompted large responses from players in older financial institutions, including Venture Capital. One professional actor who has taken an interest in this wave of financial technology are Lawyers. The rise of blockchain and smart contracts has optimised legal practice and presents a powerful opportunity to expand existing practices and create new ones. Primarily, it is a new market for legal services. Lying in between old world legal advice and new world technology, blockchain, ICOs and cryptocurrencies are surrounded by regulatory shadows that are hitherto now, not thoroughly demarcated. Legal support is especially needed in ICOs, where the demand for legal help is driven by the legal uncertainty, regulatory crackdowns and the need to be seen as legitimate.

Furthermore, the current regulatory atmosphere appears to be either a ban or a case-by-case approach. For lawyers this means more work as ICOs will not have a definitive classification, and, as shown by the Australian Guidance Document, they can touch several regulatory issues as to their actual nature. For entrepreneurs, this presents financial burden, uncertainty and can encourage a sheltered investing attitude, potentially offsetting innovation by stifling risk-taking.

Regulation and Law: Make or Break

Yet, it is not simply what the new technology can do for lawyers that is an interesting question. How can lawyers future proof ICOs and help foster innovation?

The law is a powerful tool for shaping environments and creating incubatory atmospheres. Legal standards need to be developed to do more than simply protect investors; a healthy legal environment provides structure and rigidity, along with certainty, to the operations of ICOs. Unfortunately, the law always lags behind innovation, playing more of an overseeing role than a driving force in developing technology. Due to this, it is key that lawyers form standards and come to consensuses on ICOs to relieve pressure on said entrepreneurs.

This extends beyond simply having good practices at one firm, it includes a willingness to work together, sharing best practices, educating the industry on new ICOs, methods and technologies. To that end, actively asking and answering questions that would be missed by entrepreneurs is key to seeking to bridge knowledge gaps and representing the best interests of development.

Moreover, lawyers have a key role in forming regulation. Representing the interests on behalf of the cryptomarket towards regulatory bodies may become a role of lawyers in the future, especially if harmful legislation is levied against ICOs and coins. As Jacek Czarnecki, general counsel at Neufund, suggests:

“This goes well beyond lobbying activity and should rather be perceived as community development work.”

Journalistic oversight of regulatory bodies, with the effective use of dialogue channels, is necessary to achieve this, from forming industry groups who cooperate to form policy proposals to greater connections with clients and companies within the cryptosphere, lawyers will be called upon to play a larger role in the coming years.

Future Proofing

A key message in the guidance document was the principle of promoting investor trust and confidence. It is hard to cultivate trust when the market presents high volatility, little regulation and the chance of regulatory oversight closing operations. As a result, ICOs should seek to demonstrate transparency to attract and secure investors.

For example, describing your ICO as a crowd-funding when it does not pertain to one nor apply the applicable legal regulations in running a crowd-funding platform, would certainly draw negative attention. One method for increasing trust would be for companies to open dialogue with investors by laying all their cards on the table and being as clear as possible. From having a detailed strategy to outlining timelines in a whitepaper, having transparency permeate all operations of the ICO is key to promoting investor trust. The bans were enacted on the basis of protecting people from nefarious activities, thus having clear goals and genuine expectations is necessary.

Avoiding hyperbolic language and relying on real statistics can prevent inflated expectations and claims of misrepresentation or fraud. Lawyers should seek to highlight the benefits of the ICO whilst promoting the business strategy behind the call for funding, again whilst simultaneously urging caution. Self-regulating will show genuine intention to protect the investor and avoid unwanted attention from regulators.

Conclusion

Certainly, ASIC’s regulatory guidance is a milestone towards establishing regulatory certainty for ICOs and ensuring the necessary legal protections exist for both sides. Such a move will prove influential in legitimising tokens, perhaps even drawing more support from Venture Capitalists. This willingness to issue guidelines should be welcomed and promoted; striking a balance between protecting people and protecting innovation.

The role of lawyers and others within the crypto community has thus shifted, now such players will need to issue journalistic review of the rules, engage with regulators and use ASIC and other guidelines as persuasive to moving forward. Whilst the guidelines rely on existing laws to police ICO usage, the willingness to extend provisions to include them shows there is hope for strong, positive regulation. In a time of great uncertainty, small victories make the rewards all the sweeter.

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Cryptocurrencies

IOTA, the Tangle and the Future

 5 min read / 

iota tangle

Back in November, rumours of a “partnership” between IOTA and Microsoft caused the price of MIOTA to shoot above $5. Following the recent crypto-crash, however, MIOTA is currently trading at around the $3, up from recent lows of about $2.

Whether they’re day trading, HODLing or simply interested in the technology, many crypto-enthusiasts want to know how high IOTA can go.

The Internet of Things

IOTA (which stands for “Internet of Things Application”) has been touted as a “cryptocurrency of the future”, which supposedly solves the scalability problem that is plaguing some of its larger peers.

IOTA’s developer team are trying to capitalise on the imminent boom in the number of connected smart devices that are going to hit the market in the next 10 or so years. Some estimates put the figure as high as 50bn, which when you consider the proliferation of smartphones and computers, as well as newer products such as smart watches and various home devices, is not that hard to believe.

This increase in smart devices is due to lead to an exponential increase in the number of micro-transactions that take place at any moment. Already, nearly all new software companies have transitioned to a SaaS (software as a service) model, which means customers make repeated payments for the product. Netflix and Spotify exemplify this trend.

As more and more businesses transition towards offering some kind of service, costs are going to be pushed lower, causing the number of micro-transactions to soar. Micro-transactions are typically defined as anything below $0.75 but, as the Internet of Things plays out, could well be far lower.

IOTA aims to facilitate this huge increase in micro-transactions through its “Tangle”.

The Tangle

Whereas most cryptocurrencies rely on some form of blockchain technology, IOTA’s developers use the Tangle. Rather than have miners solve cryptographic puzzles to verify new blocks, the Tangle is block-less and requires no miners.

The lack of miners means that there is no centralisation of the Tangle. Ironically, while many cryptocurrencies claim that they are decentralised, there is, in reality, a political and economic centralisation around miners. In response, some cryptocurrencies are moving away from established Proof-of-Work protocols and towards Proof-of-Stake ones, which will tackle this centralisation problem.

Proof-of-Stake protocols enable blocks to be verified by a population of token- or coin-holders who store their digital assets in special wallets. Therefore, stakeholders will already have skin in the game, and will not be people who purchase hardware for the sole purpose of profiting from mining. However, even in this scenario, there is some degree of centralisation as decisions are made in proportion to a stakeholder’s holding.

In the Tangle, there is no separate mining, whether by Proof-of-Work or Proof-of-Stake. Instead, anyone who executes a transaction on the Tangle will automatically verify two further transactions. This has the additional benefit of speeding up the network the more one uses it.

It All Comes Down to Fees

The Tangle also sets itself apart because it has feeless payments, which in turn facilitate micropayments. After all, who would pay for a coffee in bitcoin when the transaction fee itself might be 10 times the cost of the beverage; the fee for a micro-transaction could easily be 100 times its cost.

Since miners need to be reimbursed and then rewarded for their efforts, transaction fees are charged by most blockchain systems. However, since transactions on the Tangle are verified by users and not miners, there is no direct need for IOTA to charge a transaction fee. Therefore, micro-payments and IOTA are a seemingly natural fit.

What Next?

On paper at least, IOTA not only enables micro-transactions, it increases the scope for companies to engage in B2B activity by monetising more of their resources. In theory, companies could charge seemingly irrelevant fees for API access, which could then be passed onto consumers who might well never realise the cost.

Furthermore, IOTA has the potential to be truly decentralised because of how it does not discriminate between transaction issuers and transaction approvers, thereby reducing the scope for conflicts between parties and wasted time or resources. In the last six months, bitcoin has had two major hard forks, which have seriously ruptured its developer community, if not necessarily its price.

IOTA is already being used in a number of ways, including electric vehicle charging and parking; all in all, over $10bn has been transacted across its network. Aside from Microsoft, IOTA’s potential has been noticed by other big tech players such as Amazon and (if rumours are to be believed) Tesla. Although these reported “partnerships” are yet to be confirmed, industry interest can only be a good sign going forward.

Developers, Developers, Developers

Although IOTA’s team have made some big promises, its future is determined by its developer team. Despite how innovative IOTA’s technology is, CoinGecko.com rates its developer team at just 68%, putting it behind even Dogecoin (whose founder recently called his project a “joke”).

Furthermore, last summer, there were serious concerns over IOTA’s wallet, which was beset by glitches that often displayed a balance of zero despite users holding MIOTA. Although this has since been resolved, the episode does somewhat stain the reputation of IOTA’s team.

Nevertheless, IOTA has continued to climb and has grown into one of the major cryptocurrency players. Regardless of past issues, everything is still to play for. At recent events, IOTA’s team have announced that they are in conversations with several national banks about the potential use of their system.

Should IOTA pull off some of these corporate and national partnerships – as well as deliver on its technological promises – IOTA’s market cap might one day rival that of Ethereum or even bitcoin.

 

Keep reading |  5 min read

Cryptocurrencies

Two New Blockchain ETFs, So What?

 4 min read / 

New Blockchain ETFs

With the recent failure to get cryptocurrency Exchange-Traded Funds (ETFs) up and trading, the Nasdaq has listed ETFs this week by two companies that have shifted their focus to building portfolios of publicly listed companies with their hands in blockchain technology.

On its face, this might seem like exciting news for blockchain and crypto enthusiasts looking to get some investment exposure in the technology. However, anyone reading the headlines should temper their expectations upon a deeper look.

What are They?

The two ETFs that are now trading on the Nasdaq are listed under the stock tickers (BLOK) and (BLCN).

BLOK is an actively managed portfolio run by the company Amplify ETFs. Under Amplify’s original registration statement prospectus with the Securities and Exchange Commision (SEC), the ETF was originally going to be called Amplify Blockchain Leaders ETF.

However, with good reason, the SEC was cautious to allow the fund to be listed with blockchain in its name over fear of having its stock price increase exponentially. Thus, Amplify settled on the name “Amplify Transformational Data Sharing ETF.” Since BLOK is actively managed, as opposed to its counterpart BLCN, the fund claims that this style of management will allow the fund to actively respond in real-time to blockchain related events and news such as IPOs, acquisitions, partnerships and strategic announcements, which could have an impact on the valuations of companies in the blockchain space. Amplify defines BLOK as a portfolio of “publicly-traded global equities actively involved in blockchain technology via investment, research or revenue creation.”

So, what are you buying if you decide to invest in the BLOK ETF? Well, many brand name tech companies that aren’t necessarily directly impacted all that much by blockchain technology. BLOK’s top holdings consist of giant tech companies such as IBM, Microsoft, Intel and NVIDIA, the e-commerce site Overstock.com, a payment processor Square, and the banking conglomerates Citigroup and Goldman Sachs.

Of those listed, only a few actually have heavy investments in blockchain. The two leaders being IBM, which has a department of 1,500 employees dedicated to blockchain technology, and Overstock.com, which is quickly transitioning from an e-commerce to a blockchain Bitcoin company.  That is not to say that these companies can’t indirectly benefit from the developments of blockchain and the growing popularity of cryptocurrencies.

For example, NVIDIA’s stock price has increased by over 400% in the last 2 years because of the strong demand for its graphics processor units (GPUs). NVIDIA’s GPUs are among the most popular computer chips used by cryptocurrency miners who are looking to get rich and act as nodes for blockchain networks such as bitcoin. In fact, all of the holdings of BLOK do in some capacity have exposure to blockchain – although some are slight. However, any investor wanting to gain real exposure to the technology should look elsewhere, because the ETF resembles something more of a tech ETF, with some random payment processors and banks thrown in the mix, than an actual blockchain ETF.

Unfortunately, BLCN hasn’t distinguished itself from BLOK and a real blockchain ETF. BLCN is a passively managed ETF from the company Reality Shares ETF. Reality ran into similar trouble with the word blockchain being in its original name, Reality Shares NASDAQ Economy ETF, in its registration statement prospectus with the SEC. Reality settled on the name “Reality Shares Nasdaq NextGen Economy ETF.” Unlike its counterpart BLOK, BLCN is a passive index tracked ETF that will track an index, similar to the S&P 500, on the NASDAQ and will not be actively managed.  The holdings in the index are very similar to the current holdings of BLOK, and features names such as IBM, Overstock.com, Intel, Microsoft, and NVIDIA. This leaves investors without real hard blockchain exposure.

Final Thoughts

Even though the two new ETFs aren’t exactly what blockchain enthusiasts were hoping for in terms of gaining easy access and a more diversified exposure to companies that are specifically focused on blockchain tech, it is a good start for those looking to perhaps dip their toes in the water of the blockchain world. However, it still remains that, outside of investing in the Bitcoin Investment Trust from Grayscale traded under the ticker GBTC, purchasing bitcoin and other cryptocurrencies outright on Coinbase or a purely crypto exchange like Bittrex or Binance is the only way to get a true exposure to blockchain and the crypto economic world.

Keep reading |  4 min read

Cryptocurrencies

Cryptos Rally Slightly

crypto prices

Following one of the worst crypto crashes since 2015, cryptocurrencies posted moderate recoveries.

Editor’s Remarks: Bitcoin dipped into four-figure territory at the nadir of the short-lived crash that many touted as the “end of cryptocurrencies”. However, most major currencies were up yesterday as they commenced a recovery. Ripple, which fell as low as $0.90, was up to $1.40 by midday, while NEO resumed its upward trend. Bitcoin’s recovery has been notably weaker than its smaller cousins, some of whom are up 60% in the last 24 hours against bitcoin. Ethereum gained back some of the ground it lost too and is settling in once more above the $1,000 mark.

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Keep reading |  1 min read

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