Your Cryptocurrency Newsletter for 16 SEPTEMBER, 2020

If you are interested in cryptocurrencies, this newsletter is for you. [img]  [Learn more about RevenueStripe...](   [Learn more about RevenueStripe...]( [img]( [FeedBinary Newsletter]( [The SEC Cryptocurrency Statement: What is SEC Regulating?]( I learnt about the new ‘Statement On Digital Assets And Their Classification And Treatment’ issued by the Nigerian Securities and Exchange Commission (SEC) yesterday from a friend who wanted to understand what the ‘Statement’ means for his business in the Nigerian cryptocurrency space. On the face of it, the Statement gives us an insight into SEC’s approach towards regulating the rapidly expanding cryptocurrency space. While the Statement clearly establishes SEC’s intention to introduce regulation in the near future, it leaves some other issues needing clarification. This piece is my attempt at thinking through the Statement and what it might mean for the future of the Nigerian cryptocurrency regulation framework. First, we need regulation We are now past the point where we ask if Nigeria’s cryptocurrency space needs regulation; the issue at this point is how to do it. The need to protect consumers and unsophisticated investors in emerging industries is a key driver for creating framework regulations. As with any emerging industry, especially in finance, the predictable emergence of scams and fraudulent behaviour requires clear regulation to protect investors and ensure safety within markets. From the stakeholder perspective, investors need clarity on existing legal frameworks before they inject their money. We are already witnessing the exit of Nigerian crypto businesses to more structured jurisdictions due to the absence of existing frameworks. So, surely, the SEC Statement sends a good signal. The Statement, however, highlights some of the problems regulators all over the world face with regulating crypto-assets. The classification problem: Is it a bird or a plane? Crypto-assets present a unique problem for regulators because they exist as hybrids between assets, currencies, securities, and commodities. For context, The United States Treasury categorises bitcoin as a decentralised virtual currency, while its Commodity Futures Trading Commission and the Internal Revenue Service classify it as a commodity and an asset, respectively. In these instances, regulators seek to classify crypto-assets in ways that bring them within their regulatory jurisdictions. The classification of crypto-assets also differs across countries. The South African Revenue Service classifies bitcoin as an intangible asset. The German Federal Bank recommends using the term “crypto token”. The People’s Bank of China has stated that bitcoin “is fundamentally not a currency but an investment target.” For regulators, the classification problem is a special problem because of the jurisdiction issue. The issue of jurisdiction [issue of jurisdiction ] Regulators must operate within the scope of the jurisdiction granted to them under the law. To be able to regulate the crypto-assets space, a regulator must show that the space falls within its jurisdiction. The SEC, in the Statement, relies on Section 13 of the Investment and Securities Act, 2007 which grants it powers to regulate investments and securities business in Nigeria. What this means is that the SEC lacks jurisdiction to regulate cryptocurrencies as currencies, mere assets, or mere commodities. To be clear, the Statement says, “the SEC will regulate crypto-token or crypto-coin investments when the character of the investments qualifies as securities transactions.” Covering the Field? “The position of the Commission is that virtual crypto assets are securities, unless proven otherwise. Thus, the burden of proving that the crypto assets proposed to be offered are not securities and therefore not under the jurisdiction of the SEC, is placed on the issuer or sponsor of the said assets.” What the SEC appears to say with this declaration is ‘we will assume jurisdiction over every virtual crypto-asset until the issuer of the crypto-asset shows us otherwise by showing us that the crypto-asset is not a security’. If this is the case, it makes sense that the regulator seeks to cover every possible field especially as new forms of crypto-assets continue to emerge. However, the lack of specificity puts all crypto-related businesses in a difficult situation as they automatically fall under the SEC’s jurisdiction until the SEC states otherwise. The burden this places on businesses becomes more obvious when we consider that the CBN is expected to issue its own crypto regulations soon. From an absence of regulation a few days ago, businesses might now be answerable to two regulators with differing compliance frameworks. An alternative and more reasonable interpretation of the SEC’s declaration is that it applies only to crypto-assets and investment instruments issued specifically by companies to raise funds for a project or business. We are seeing the re-emergence of Initial Coin Offerings by startup founders to fund their projects. We are also seeing an emergence of online investment schemes issuing crypto-tokens to participants as forms of participation in these schemes. Indeed, by tracking ‘the issuer or sponsor of the said assets’ for explanation as to whether or not the assets qualify as securities, the SEC follows its mandate of regulating issuers of securities within the Nigerian market for the purpose of protecting the investment and securities space. However, this interpretation would mean that businesses offering platforms for exchange of decentralised currencies like bitcoin and ethereum would not fall within SEC’s jurisdiction. Reasonably, these other crypto trade businesses would fall within the regulatory jurisdiction of the Central Bank of Nigeria since they can neither be classified as ‘issuers’ nor ‘sponsors’ of crypto-assets and they deal with crypto-assets as currencies and means of exchange. If this is the SEC’s intention, greater clarity is needed in its forthcoming regulations. Who will be regulated? “Any person, (individual or corporate) whose activities involve any aspect of Blockchain-related and virtual digital asset services, must be registered by the Commission and as such, will be subject to the regulatory guidelines. Such services include, but are not limited to reception, transmission and execution of orders on behalf of other persons, dealers on own account, portfolio management, investment advice, custodian or nominee services.” This declaration raises the same question earlier discussed. Is the intention really to cover every type of blockchain activity? If this is the intention, the SEC might be stepping out of its jurisdiction. A roadside shop offering bitcoin for cash services could not possibly fall within the SEC’s regulatory remit under the Investment and Securities Act except the SEC intends to classify bitcoin as a security. If the intention is to cover persons and businesses dealing in any way with crypto-assets which qualify as securities, then the SEC will need to provide more clarity in its forthcoming regulations especially on the types of crypto-assets that qualify as securities. [Read Full News]( The post [The SEC Cryptocurrency Statement: What is SEC Regulating?]( first appeared on [Feed Binary](. [Read Full Story]( ------------------ You Might Like     [Learn more about RevenueStripe...]( ------------------ [Cover Story: Are Tighter Cryptocurrency Regulations Needed?]( It has been more than 1½ years since regulations were introduced in the local cryptocurrency landscape and several months since registered digital asset exchanges (DAXs) began operating. Yet, a considerable chunk of trading continues to occur outside the regulated cryptocurrency space, industry players estimate. Kelvyn Chuah, co-founder and managing director of Sinegy Marketplace (Sinegy), and Hong Qi Yu, founder of Tokenize Exchange (Tokenize), estimate that at least half of the total monthly cryptocurrency trading volume in Malaysia takes place outside regulated exchanges. Meanwhile, David Low, Luno’s general manager for Southeast Asia, says using a rough estimate based on website visits and posted trading volume in Malaysia, at least RM100 million worth of cryptocurrency is traded outside the regulated channel each month, which is more than half of total trades in the country. “This leaves some investors unprotected,” he says. [cryptocurrency regulations] “The number is just a very conservative estimate, as unregulated exchanges that operate from countries outside Malaysia facilitate trading of many more cryptocurrencies than the four listed on our platform (bitcoin, ether, ripple and litecoin). “These unregulated exchanges do not just operate in the spot market, but also offer derivatives and are involved in margin lending. These are the so-called ‘sexy’ services, and the trading volume in those spaces has not yet been considered. “I also arrived at that number by assuming that cryptocurrency trades that happen through private chat groups make up 30% of the estimated trading volume that goes through unregulated exchanges. But it could be higher,” he says. While the size of the unregulated cryptocurrency market has yet to pose a systemic risk to the financial markets, it is a worrying trend if unregulated players are allowed to continue to launch marketing campaigns to lure local investors and grow the unregulated space at a rate faster than that of the regulated one. Investors could be more susceptible and fall prey to scams. When they become victims, they will have no legal recourse. “For instance, we heard of cases where some unregulated P2P (peer-to-peer) platform users used fake banking receipts to scam victims of their bitcoin. Let’s say I am selling bitcoin to you and you are paying me RM5,000 through interbank GIRO, which takes one to two working days for the money to be go through. Instead of actually performing the transaction, you generate a fake receipt. [I may not check my account to verify the transaction and instead] would send you my bitcoin in that one to two days,” says Low. “Investors [in this case, the seller] will have no legal recourse against the scammers when things like this happen.” Chuah concurs. “We have heard that users who traded through unregulated exchanges and P2P platforms did not get the money or amount of bitcoin they were supposed to receive. Some people are capable of gaming the system. “In other cases, you might receive fiat currency through a third-party bank account instead of the person with whom you are supposed to trade. In this case, you don’t know what you might be getting yourself involved in and whether the money is clean,” he says. Meanwhile, local scams related to cryptocurrencies have been on the rise. Low says Luno and other regulated exchanges have organised educational events for the Royal Malaysia Police (PDRM), as the latter is looking more seriously into the cryptocurrency-related space. He says more sophisticated scams have also started to surface recently. “For instance, there are scammers who scan genuine classified advertisements (for sell orders) on [overseas] P2P cryptocurrency platforms. They then go to social media platforms to pretend to sell products “Let’s say there is a classified ad selling a certain amount of bitcoin for RM1,000. The scammers will then place a fake posting on social media to sell, say, masks by asking the buyer to transfer RM1,000 into the bitcoin seller’s account directly in exchange for products that he does not intend to deliver. “The scammer then tells the seller that he has already paid him RM1,000 [and quotes the bank account details of the mask buyer]. The scammer then benefits from the trade while the mask buyer has been scammed and the bitcoin seller [is unknowingly involved in the scam too]. This is considered a sophisticated scam,” he says. Sinegy’s Chuah was recently invited by a brokerage firm to help solve a case related to cryptocurrency. To circumvent regulations, a client of the firm who sold cryptocurrencies asked his overseas buyers to deposit fiat money into his brokerage account, instead of his personal bank account. “The person does not want the bank to know about the transactions [which can lead to the closing of] his personal bank account. “I was invited by the brokerage firm to help them solve the problem. The whole process involved conducting Zoom calls with all the people involved in the transactions to record their faces and voices to verify their identity and the source of money. At the same time, the brokerage firm also has to think about how to handle the money that has been deposited into the account,” he says. Money laundering is another concern when trading through unregulated channels. Low gives an example of how it can be done. Let’s say you want to move some funds to Europe.  All you need to do is buy bitcoin from the unregulated channel and find an unregulated exchange in Europe that provides the conversion of bitcoin to euros. “Then, you send over your bitcoin to the exchange, convert it to fiat money [by selling the bitcoin on the exchange] and withdraw it from your bank account in Europe. “Or, if the exchange allows you to withdraw your money in US dollars, you can even withdraw your bitcoin in US dollars through an offshore account under your name. “Unregulated exchanges won’t verify your identity and source of funds. Even if they might, you can give an excuse and they will not look into it [further],” he says. Higher cost and stricter operating environment Unregulated trading activities have been happening locally. Richard (not his real name) has a rather lucrative side hustle as a cryptocurrency broker facilitating trades in the private market. Richard has been doing this since 2017, when he was involved in the launch of an ­initial coin offering (ICO). On a good month, he can make RM20,000 and on a bad month about RM4,000, depending on the market trend for cryptocurrencies. Richard, who works full-time as a brand consultant, sources his cryptocurrencies from unregulated exchanges overseas such as Remitano, a popular platform operated by a company incorporated in Seychelles, and Binance, one of the largest cryptocurrency exchanges globally. Sometimes, he does not even bother to go through an exchange (regulated or otherwise) and just buys the cryptocurrencies directly from sellers through private messaging platforms before selling them to buyers. The number and size of his trades have dwindled since 2019, after bitcoin prices plunged from their peak. Trading activity began to pick up slightly since the Movement Control Order in March, however, as investors had time and spare cash to invest because of the loan moratorium. Investors like trading through brokers such as Richard, as the fees are lower and they do not need to go through a thorough know-your-customer (KYC) process. “The fee can be 5% to 10% cheaper than trading through regulated, and even some unregulated, exchanges, especially to fulfil large volumes. Buyers also like that they get more privacy [through brokers like me],” he says. The Securities Commission Malaysia’s (SC) decision to regulate the cryptocurrency space is welcomed by operators of regulated exchanges. However, they say unregulated trading activities have created an uneven playing field for regulated DAXs. The competition between the DAXs and the unregulated market is stiff, say the three regulated players. Luno’s Low says the regulated cryptocurrency exchanges are required to comply with the existing regulations to protect investors’ interest. While the DAXs are happy to do so, it is obvious that their operating cost is higher than that of the unregulated exchanges and individual brokers. For instance, DAXs are required to set up a proper KYC process and implement screening for anti-money laundering. These measures will verify their clients’ identity and make sure the money they receive is legitimate. “Without such processes, you are running the risk of trading with criminals who conduct illegal business activities, including money laundering and terrorist financing,” Low says. Regulated exchanges also need to pay custodian fees so that investors’ money and digital assets are kept in safe hands. This ensures that the exchange operators cannot swindle investors’ fiat money and digital assets, says Low. Sinegy’s Chuah says DAXs are required to have proper measures such as a circuit breaker to prevent crashes on their exchanges. “We need to put in place market surveillance to monitor market activities to ensure there is no market manipulation. We are required to maintain a fair and transparent market for our users,” he adds. In addition, regulated exchanges need to keep investors’ digital assets in hot and cold wallets according to a specific ratio, to further safeguard their monies. They also need to ensure that their customers use two-factor authentication (2FA) to withdraw their assets, says Chuah. Low and Chuah point out that setting up these processes and measures come with additional costs that unregulated exchanges and individual brokers do not have to fork out. “Many exchanges out there might claim that they have their processes in place. In fact, they might only have some simple processes in place,” says Low. A higher operational cost also means DAXs could be charging their users a slightly higher fee compared with unregulated exchanges. This puts them at a disadvantage, says Low. In addition, DAXs are required to work closely with banks and custodians to facilitate fiat currency transactions between customers. It means some of their services, including fiat currency withdrawal, are not available over the weekends, says Low. They will also need to make an application to the SC to list new cryptocurrencies on their platforms to protect investors from trading coins that could be scams. “Our liquidity is also not as great compared with the unregulated exchanges, as we are required to maintain an order book that contains only Malaysian residents who have gone through our KYC process. If you sign up on Luno, you get access to the order book and transact with another user in Malaysia. The regulator does this for good reason, as cross-border trading can easily expose us to the risk of money laundering. “Unregulated exchanges or individual brokers can, however, sign up any person around the world and include them in their order book. They do not care who is in the book. The more the better, as that means more liquidity,” says Low. Investors who have fallen victim to scams or face issues with any of the DAX operators can file their complaints with the SC. DAXs want tighter regulations and stablecoin listing Platform operators also welcome the regulator’s decision to put the names of unregulated exchanges, including Binance and eToro, on its Investor Alert list. They hope the regulator can introduce further initiatives to drive more cryptocurrency users to the regulated space. For instance, Low wants the SC to ban local users from accessing the website of unregulated exchanges such as Binance and eToro until global regulations on cryptocurrency exchanges are put in place. “I certainly hope that they would go all the way to ban the IP address of the unregulated platforms. That would require collaboration between the SC and MCMC (Malaysian Communications and Multimedia Commission). That could be the first step,” he says. “They should consider working with Apple and Google to inform them that these exchanges are operating illegally in Malaysia. The mobile apps of these platforms should also not be offered here,” he adds. Meanwhile, Chuah hopes the regulators will allow the listing of Tether, a stablecoin whose value is pegged to the US dollar, on regulated exchanges. He says Tether is the most traded cryptocurrency after bitcoin. “Once regulators allow for stablecoins, including Tether, to be traded on DAXs, we will be able to chip away at the trading volumes of the unregulated exchanges,” he notes. For now, the four cryptocurrencies allowed for trade on regulated exchanges are bitcoin, ether, litecoin and ripple. Hong of Tokenize says investor education is equally important so that people will trade on regulated exchanges knowing that their interests are well protected. Edmund Yong, co-founder of Celebrus Advisory, a bespoke consultancy firm that specialises in blockchain development and business tokenisation, says regulators should regulate individual brokers who match cryptocurrency trades through private chat groups. “It is fine if you are a private investor. It will be like collecting stamps or coins on a P2P basis. But, when you are doing it actively and facilitating trades, it is akin to operating a marketplace or running an exchange. “The worst part of it is that they are facilitating trades of stable coins pegged to the US dollar, such as Tether, in large volumes — some of them for cross-border business transactions. You cannot say you are a collector. They are essentially money changers,” he says. Yong says the existing anti-money laundering and countering financing of terrorism regulations allow the regulator to take action against these individuals if the source of funds is illegal. In Malaysia, PDRM has the statutory powers of confiscation. The key challenge lies in enforcement of the regulations, which requires evidence gathering, says Yong. [Read Full Newsletter]( The post [Cover Story: Are Tighter Cryptocurrency Regulations Needed?]( first appeared on [Feed Binary](. [Read Full Story]( ------------------ You Might Like     [Learn more about RevenueStripe...]( ------------------ [How Crypto Can Win Over Washington, DC]( Our industry seeks to revolutionize many of the most important and regulated functions of our society. Due to that ambition, no other industry of comparable size and age has so quickly captured the focus of policymakers and regulators. This attention creates unique challenges and opportunities. Policies enacted in the coming years related to securities laws, anti-money laundering and know-your-customer requirements, market integrity and taxes could smother our nascent industry, or they could lay the foundation for a flourishing and vibrant cryptocurrency and blockchain economy. the Financial Action Task Force, an international financial surveillance standards-setting body, has signaled that some of its members may be seeking to restrict peer-to-peer cryptocurrency transactions and the use of un-hosted wallets. Eliminating or restricting individuals’ ability to transact directly with one another would undermine the fundamental innovation of cryptocurrencies and turn them, in essence, into yet another speculative asset class. On the other hand, legislation in the U.S. Congress such as the bipartisan Virtual Currency Tax Fairness Act, which would exempt from an individual’s taxable income any gain resulting from a personal transaction using virtual currencies so long as the gain is less than $200, would remove a significant barrier to the wider adoption of cryptocurrencies. Our team at The Block chain Association works to ensure that lawmakers and regulators see the industry for what it truly is: the future. And since we founded two years ago, there have been a number of positive regulatory developments for our industry. They include the bipartisan Token Taxonomy Act, which would exempt certain digital tokens from U.S. securities laws; Securities and Exchange Commissioner Hester Peirce’s Safe Harbor proposal would exclude certain tokens from the definition of a security under U.S. law for three years; and the Office of the Comptroller of the Currency’s (OCC) recent interpretive letter, which opens the way for national banks to provide custody services for cryptographic assets and eliminates ambiguity inhibiting broader institutional adoption of cryptocurrencies and blockchain-based services. However, these bright spots should not obscure the seriousness of several big challenges looming on the horizon. How do we secure the progress already made and combat threats to the potential of the industry? The public policies that we need for crypto to thrive cannot be achieved if our industry is unwilling to unite and work with the government. Some in the crypto world, based on a general aversion to anything centralized, view engagement with regulatory agencies and members of Congress as anathema to the spirit of permissionless networks. This approach is a losing one. The public policies that we need for crypto to thrive cannot be achieved if our industry is unwilling to unite and work with the government. If men were angels, government regulation would be unnecessary. More established industries have long recognized that working together in Washington, even with their most vicious competitors, is an essential component of their success. Do Coke and Pepsi like collaborating in D.C.? They do work together, and not because the sugar has gone to their heads, but because they are more likely to get what they want from the government by combining their powers. Other industries, like Big Tech, have learned the hard way that robust engagement with national regulators is necessary to maintain and grow their market positions. For crypto to reach its true potential, we likewise must win looming policy debates in Washington by expanding our base of support and being better prepared for an ever-changing political environment. To put it bluntly, there are many who see anything to do with cryptocurrency as a scam, a tool for terrorists, or most mildly: an unsound investment. This sentiment is embodied by Rep. Brad Sherman’s diatribes against crypto. In 2019, he called for an outright ban of cryptocurrencies, noting: “It is the announced purpose of the supporters of cryptocurrencies to take the power of the [U.S. dollar] away from [the United States]. [Read Full News]( The post [How Crypto Can Win Over Washington, DC]( first appeared on [Feed Binary](. 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