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A Look Ahead at Crypto-Compliance & Regulation in 2018

· February 21, 2018 · 4:30 am

Looking forward to 2018, several new pieces of legislation will be voted on or come into effect that will – for better or worse – reshape how ICOs, cryptocurrencies, and their investors function. Whether these laws target cryptocurrencies and initial coin offerings directly doesn’t change the fact that they will have a significant impact on the industry globally.

[Note: This is a guest article by Zarah Tinholt and Matthew Unger]

The past year was a year of many firsts for blockchain, ICOs, and distributed ledger technology (DLT) but 2018 is already making major waves its own right. From long term public companies such as Kodak announcing an ICO to Bitcoin’s price dropping to half of its value only a month prior – the pace of change already feels faster and more ferocious.

Nonetheless, 2018 shows significant risks, threats, and opportunities as the decentralized economy starts to take hold in global financial markets.

Recently, we provided an in depth look at major major trends in blockchain, initial coin offerings (ICOs), and cryptocurrency that took place throughout 2017 from a compliance perspective. They say hindsight is 20/20, so consider this article a compilation of predictions and trends, based on our research – not financial advice nor legal opinion – on major changes and opportunities in compliance and regulation.

Europe – Global Data Protection Regulation

In March, new rules surrounding the acquisition and storage of personal information will come into effect. This new legislation, titled GDPR (Global Data Protection Regulation), has some serious teeth: a minimum $20 Million Euro fine for improperly acquiring or storing the personal data of any citizen in the European Union.

In the crypto world, it is expected that GDPR will have the biggest impact on exchanges, wallet providers, ICO issuers and ICO advisory firms. A perfect example of what not to do can be seen in the recent Sweetbridge ICO, where the issuer required investors to upload passport or government ID into a Docusign form.

As another example, blockchain startups offering to store personal identity on blockchain – encrypted or not, these entities are taking personal information and storing it in a publicly available dataset – a sure way to incur liability in today’s environment.

Many of the issuers who come to iComplyICO have suggested emailing datasets of investor information, a sure way to breach privacy laws in multiple countries. We have a strict policy to reject these practices and instead believe that zero-knowledge proof of identity – inspired by open source frameworks such as OPAL. In doing so, the ICO issuer and their advisor can make decisions around whether or not to accept funds from any investor based on the merits of compliance with KYC, AML, and other regulations without taking ownership of the investors personal data.

For the investor, this provides additional layers of security where they no longer have to worry about what every new exchange they use or ICO they invest might do with their personal identity information.

United States – HR 1585, Technical Investor Status

Currently under review, House Bill HR1585 is expected to significantly advance the efforts to democratize financial markets, should it come into effect. Until now, there have been only two types of investors in North America – accredited and non-accredited.

What HR1585 allows for is a new classification, termed Technical Investor status, that would allow someone with domain expertise to invest at their discretion in any project where their expertise was deemed relevant.

A possible example of how technical investor status could work can by illustrated with the Filecoin ICO, which was only open to accredited investors.

With technical investor status any individual with expertise in file distribution protocols, distributed ledger technology, or bitcode might be considered eligible to invest, whether or not they meet accredited investor requirements. How domain expertise will be measured and documented remains to be seen – however, this seems like another excellent application for blockchain, and for the financial world in general.

United States – S1241, Money Laundering, Money Services Businesses, and Digital Currencies

Where HR1585 might be viewed as one step forward for the modern entrepreneur, S1241 is considered by many to be three big steps back. This bill will affect most token issuers in the USA and comes with up to 5 years in federal prison and fines that can double if the offending entity’s project transacts over $1M USD – that includes nearly every successful ICO to date.

The reach of S1241 is broad and includes: token issuers, which would be classified as and subject to regulatory the reporting requirements of financial institutions; crypto investors which can have their assets seized for not declaring their digital currency holdings when crossing the border or filing their taxes, and anyone breaching any aspect of these new regulations may be subject to wiretaps and other surveillance and enforcement measures.

While S1241 has not reached final approval yet, it is still moving forward – anyone interested in seeing this bill altered or stopped should engage their local elected representatives immediately.

United States and abroad – Conveyor Belt Enforcement

In the US, the SEC is expected to take a number of broad enforcement actions, including something termed assembly-line or conveyor belt enforcement, against many of 2017’s ICOs. This method of enforcement is typically reserved for extreme cases where numerous parties demonstrate a broad disregard for the law and act accordingly.

“Assembly-line justice relies on the ability of investigative and prosecutorial specialists who eventually reconstruct a tolerably accurate account of what actually took place in an alleged criminal event. After all the facts have been gathered and the suspect apprehended and indicted, the state has extreme confidence in proving its case against the accused; indeed, under ideal circumstances, convicting the guilty becomes mechanical and routine.”

-Encyclopedia of Crime and Punishment, Volume 1, page 78

The SEC has already announced the formation and staffing up of the Cyber Unit with a direct mandate to target violations involving distributed ledger technology and initial coin offerings. Both ICO issuers and their advisors/consultants have liability when it comes to these enforcements. Many issuers are already realizing that the misguided, at-whim legal opinions they received offer little relief when it comes to enforcement action, class action lawsuits, fines, and up to 10 years in federal prison.

The CFTC (Commodity Futures Trading Commission) has also taken a stand, even after approving Bitcoin futures, and in the recent Senate cryptocurrency hearing, we saw the Commission Chairman repeatedly mention that they have made several sanctions and that there are many more to come.

The Senate hearing was an important milestone, and it served to highlight the purpose that the CFTC and SEC were trying to get across – namely – that if you are raising money for a company or a project, to protect investors, some disclosure is needed.

It may serve as a small amount of friction in some cases, but it serves to protect investors, and make sure that there is some accountability around the individuals. There are always edge cases, and bad actors – and that is what these organizations aim to regulate and take action against.

It is not all doom and gloom, but rather, the world is cautiously optimistic as large, government institutions embrace and acknowledge cryptocurrencies as financial vehicles, and work to regulate them (to the degree their jurisdictions allow), with the overall aim of protecting investors and keeping markets safe, fair and efficient.

About the authors

Matthew Unger is CEO and Zarah Tinholt is head of corporate operations at iComplyICO, an automated compliance protocol that enables issuers and their investors to both launch and trade tokens in compliance with securities, identity, and privacy regulations. ‘Prefacto’, ‘iComply’, and ‘iComplyICO’ are copyright and trademark of iComply Investor Services Inc.

Do you agree with the regulatory outlook for 2018? Share your thoughts below!

Images courtesy of Shutterstock,

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