SEC Launches FinHub, FATF Publishes Guidance, Futures and Stablecoin Markets Mature

By Taylor Thompson, Jonathan D. Blattmachr & Joanna F. Wasick on October 26, 2018

In this issue:

• SEC Launches FinHub, FATF Revises Cryptocurrency Guidance

• Capital Markets Developments in Futures, Stablecoins, Custody, ICOs

• Blockchain Enterprise Developments for Gold, Ports, BaaS and Developers

SEC Launches FinHub, FATF Revises Cryptocurrency Guidance

By: Taylor Thompson

On Oct. 18, the Securities and Exchange Commission (SEC) announced the creation of the Strategic Hub for Innovation and Financial Technology (FinHub). According to an SEC press release, the FinHub will serve as a centralized resource on the SEC’s fintech initiatives, including those relating to blockchain, digital marketplace financing, automated investment advice and AI. SEC Chairman Jay Clayton said, “The FinHub provides a central point of focus for our efforts to monitor and engage on innovations in the securities markets that hold promise, but which also require a flexible, prompt regulatory response to execute our mission.” Valerie A. Szczepanik, Senior Advisor for Digital Assets and Innovation and Associate Director in the SEC’s Division of Corporation Finance, will lead the FinHub, which will be staffed by members of various SEC divisions and offices with fintech expertise.

Earlier this week, the SEC announced the suspension of trading in the securities of a U.S.-based retail company. The SEC alleged the company made false claims that it had partnered with an SEC-qualified custodian for cryptocurrency transactions and was conducting a token offering registered under SEC regulations. In related news, the Commodity Futures Trading Commission (CFTC) announced that a federal district court has ordered a New York-based corporation and its CEO to pay more than $2.5 million in civil penalties and restitution in what the CFTC called its first-ever anti-fraud enforcement action involving bitcoin. The CFTC brought the action in response to a Ponzi scheme in which the defendants generated false statements showing gains from bitcoin trading to solicit more than $600,000 from at least 80 investors between 2014 and 2016. According to a recent report, the Australia Securities Investments Commission (ASIC) has shut down a Brisbane-based initial coin offering (ICO) project that intended to raise up to $50 million USD to create a cryptocurrency trading platform.

A study published last week claims that Lazarus, a hacker group thought to be sponsored by North Korea, has stolen $571 million in cryptocurrency during 2017 and 2018, out of an estimated total of $882 million stolen from online exchanges in that time. The Financial Action Task Force on Money Laundering (FATF), an intergovernmental organization initially founded by the G-7, recently announced an update to 2015 guidance that set out requirements for combating money laundering and terrorist financing in the virtual currency space. According to the FATF, the updates are designed to make clear that virtual assets and their service providers “are subject to AML/CFT regulations, for example conducting customer due diligence including ongoing monitoring, record-keeping, and reporting of suspicious transactions.” The FATF said it would consider further updates over the next 12 months, as it tries to strengthen the global AML/CFT regime while also creating room for innovation.

To read more about the topics covered in this week’s post, see the following:

Capital Markets Developments in Futures, Stablecoins, Custody, ICOs

By: Jonathan D. Blattmachr

There were several developments in the crypto capital markets space this week. ICE Futures U.S. Inc. announced it will list the Bakkt Bitcoin (USD) Daily Futures Contract on Dec. 12, 2018. This physical-settled futures contract calls for delivery of one bitcoin and will trade in U.S. dollars.

Coinbase now offers its customers the ability to trade the USD Coin stablecoin, which is pegged to the U.S. dollar on the Ethereum blockchain. The coins are collateralized by corresponding greenbacks. In similar news, Novatti Group, an Australian online payments processor, will issue a stablecoin tied to the Aussie dollar, with 1:1 fiat currency being held in trust.

The New York State Department of Financial Services, the state’s financial regulatory agency, recently announced its approval of Coinbase Custody Trust Company LLC, a Coinbase Global subsidiary. Coinbase Trust will be licensed to offer custody services for bitcoin, bitcoin cash, ether, litecoin and other virtual currencies. G4S also announced a new, high-security, offline storage for protecting virtual assets. Citing an estimate that more than $1.2 billion in cryptocurrency has been stolen since 2017, G4S believes its offline storage is superior, with assets fragmented and distributed across various vaults. And a major investment bank is investing $15 million in cryptocurrency custodian BitGo Holdings Inc. to offer a secure way to hold its clients’ digital assets. BitGo raised $57.5 million in this round of fundraising, but the endorsement by a household banking name may mean even more.

Ernst & Young has released a study about the ICOs that debuted in 2017, and the results are not inspiring: 86 percent of coins are below their listing price, with 30 percent now virtually worthless. Ninety-nine percent of the net gain was concentrated in 10 offerings, the majority of which involved blockchain infrastructure ventures. E&Y compared the current environment with the dot-com bust.

In Bermuda, fintech company Uulala has become the first applicant under the country’s new regulatory regime to receive approval for an ICO. The company is seeking to raise $50 million from its offering, which will support its platform of blockchain-enabled financial services being made available to underserved communities in Latin America. Also offshore, Swiss financial services provider Swissquote is claiming to be the first bank to offer purchase and custodial services for ICO participants. This announcement comes on the heels of Russia’s largest majority state-owned bank confirming it had completed a mock ICO as part of its regulatory sandbox test run.

To read more about the topics covered in this week’s post, see the following:

Blockchain Enterprise Developments for Gold, Ports, BaaS and Developers

By: Joanna F. Wasick

The London Bullion Market Association recently announced plans to use blockchain technology to track the movement of gold, with the aim of taking gold that was illegally mined or used to finance conflict out of the global supply chain. In another recent announcement, the Port of Rotterdam is partnering with banking and tech businesses to launch a pilot program that uses a blockchain-based platform for more efficient, transparent and paperless administration of processes used for large-scale container transport. And this week a major global software provider launched a suite of blockchain-based applications for businesses of all sizes that want new ways to track and analyze their production stream and sales. According to a recently published report, demand for blockchain engineers increased by 400 percent from late 2017, and annual salaries now average between $150,000 and $175,000, putting them on par with those for specialists in AI technology.

To read more about the topics covered in this week’s post, see the following: