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Canada officially approved bitcoin exchange-traded funds (ETF)

Canada officially approved bitcoin exchange-traded funds (ETF)
Over the last few days, the Ontario Securities Commission (OSC) approved not just one but two bitcoin ETFs. First was the Purpose Investment’s ETF followed by Evolve’s ETF. Both to trade on the Toronto Stock Exchange.

ETF investment model allows investors to receive income from the bitcoin’s increase in value without directly owning any crypto. This should attract more investors into the crypto market making the investment process more familiar and eliminating the risks of operating a crypto wallet. But it does not eliminate the volatility risks associated with the BTC and other cryptocurrencies. Therefore, investment into the bitcoin ETFs is considered “high risk.”

Canada joined Europe on the list of jurisdictions, which now allow such ETFs. The United States is not on this list yet. Although several companies filed with the SEC over the past few years, there have been no approvals issued to this date. Considering certain similarities between the U.S. and Canadian security market’ regulations, the OSC’s decision gives hope that the SEC may finally approve a bitcoin ETF in the near future.



Written by Katrina Arden
Attorney and founder of Blockchain Law Group
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Three individuals are charged with fraud by the SEC

Three individuals are charged with fraud by the SEC
In its complaint filed on February 1st, the SEC alleged that Kristijan Krstic, founder of Start Options and Bitcoiin2Gen, and John DeMarr, the primary U.S.-based promoter for these companies, with the assistance from Robin Enos, fraudulently induced investors to buy worthless B2G tokens. The conduct refers back to the end of 2017 – beginning of 2018.

According to the SEC, Mr. Krstic and Mr. DeMarr raised over $11 million through two fraudulent ICOs. The complaint references a large list of violations by these three individuals, including misrepresentations of the investors, sham business activities, misappropriation of millions of dollars of investor funds for personal benefit, and others.

The SEC's complaint charges Mr. Krstic and Mr. Demarr with violating the antifraud and registration provisions of the federal securities laws, and Mr. Enos with aiding and abetting the antifraud violations. The complaint seeks injunctive relief, disgorgement plus interest, penalties, and an officer-and-director bar against Mr. Krstic and Mr. DeMarr. In addition, Mr DeMarr is also facing criminal charges.



Written by Katrina Arden
Attorney and founder of Blockchain Law Group
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The SEC issues a statement and request for comment

SEC issues a statement and request for comment
On December 28, 2020, the SEC issued a very important statement and request for comment to potentially allow broker-dealers to handle digital securities, such as tokens issued to raise capital and other crypto related securities. In its statement, the SEC recognized existing issues, including technical limitations and risks, which are setting digital securities apart from the traditional investment instruments. At the same time, the SEC suggests a number of steps that could be taken by broker-dealers to minimize the risks to investors and other market participants.

At the end of its statement, the SEC asks public to provide comments to the following specific questions:

1. What are industry best practices with respect to protecting against theft, loss, and unauthorized or accidental use of private keys necessary for accessing and transferring digital asset securities? What are industry best practices for generating, safekeeping, and using private keys? Please identify the sources of such best practices.

2. What are industry best practices to address events that could affect a broker-dealer’s custody of digital asset securities such as a hard fork, airdrop, or 51% attack? Please identify the sources of such best practices.

3. What are the processes, software and hardware systems, or other formats or systems that are currently available to broker-dealers to create, store, or use private keys and protect them from loss, theft, or unauthorized or accidental use?

4. What are accepted practices (or model language) with respect to disclosing the risks of digital asset securities and the use of private keys? Have these practices or the model language been utilized with customers?

5. Should the Commission expand this position in the future to include other businesses such as traditional securities and/or non-security digital assets? Should this position be expanded to include the use of non-security digital assets as a means of payment for digital asset securities, such as by incorporating a de minimis threshold for nonsecurity digital assets?

6. What differences are there in the clearance and settlement of traditional securities and digital assets that could lead to higher or lower clearance and settlement risks for digital assets as compared to traditional securities?

7. What specific benefits and/or risks are implicated in a broker-dealer operating a digital asset alternative trading system that the Commission should consider for any future measures it may take?

If you want to get involved and provide a valuable input, you can do so by completing the online comment form at https://www.sec.gov/rules/submitcomments.htm or sending an email to rule-comments@sec.gov.



Summarized by Katrina Arden
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SEC filed a complaint against Ripple and its two executives

SEC charged Ripple and its executives with $1.3 billion unregistered securities offering
In its complaint, the SEC alleged that Ripple Labs, Inc. and its two executives Bradley Garlinghouse and Christian Larsen sold over 14.6 billion tokens called XRP from 2013 to present, for which they received over $1.38 billion dollars. During its investigation, the SEC determined that the XRP tokens meet the legal definition of securities; therefore, requiring the XRP sale to be registered with the SEC or be exempt from the registration.

Ripple never filed any registration statements. Instead, as alleged by the SEC, Ripple created an information vacuum and publicly shared information that was beneficial for Ripple, Mr. Garlinghouse and Mr. Larsen, who were the largest holders of the XRP tokens. The SEC found that Mr. Garlinghouse and Mr. Larsen personally profited by approximately $600 million from their unregistered sales of the XRP tokens, while engaging in touting, which is illegal under the U.S. securities law.

The complaint describes in details how Ripple and its executives had been violating the U.S. securities law for a number of years. The SEC’s main concern that the company and its two executives continue to hold a substantial amount of the XRP tokens and can continue to monetize their holdings while using the “information asymmetry they created in the market” for personal gain, while placing the investments of others at substantial risk.

The SEC is seeking injunctive relief, disgorgement with prejudgment interest, and civil penalties. Interesting to note that the SEC did not bring any fraud charges against the two executives.



Summarized by Katrina Arden
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SEC published its fiscal year 2020 annual report

SEC published its fiscal year 2020 annual report
On November 2nd, the SEC published an annual report summarizing its enforcement efforts taken during the fiscal year 2020.

Overall, in the fiscal year 2020, the SEC brought 715 enforcement actions, including 405 standalone actions. Cases included a variety of violations such as the issuer disclosure and accounting violations; foreign bribery; investment advisory issues; securities offerings; market manipulation; insider trading; and broker-dealer misconduct. Besides, this year the SEC had to face the new COVID-19 related wrongdoings.

As a result of its efforts, the SEC obtained judgments and orders totaling approximately $4.68 billion in disgorgement and penalties and returned more than $600 million to harmed investors. In addition, the SEC awarded a record $175 million to 39 whistleblowers. It is both the highest dollar amount and the highest number of individuals awarded in any fiscal year.

Among all enforcement actions, there was a number of cases that the SEC brought against the blockchain companies; all of them related to the unlawfully conducted ICO. You can find more information about them in our monthly review published in Crypto World Journal.



Summarized by Katrina Arden
Attorney and founder of Blockchain Law Group
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SEC secures a final judgment against Kik Interactive, Inc.

SEC secures a final judgment against Kik Interactive, Inc.
The case against Kik Interactive, Inc. initiated more than a year ago by the SEC has finally come to an end. On October 21st, the SEC secured a final judgment on consent against the company for the unregistered offering of digital tokens “Kin” in 2017.

The allegations brought by the SEC against Kik Interactive, Inc., were based on the activities of the company before and during the ICO. The SEC alleged that by 2017 the business of the company was failing, and Kik Interactive, Inc., intended to finance its new operations by selling one trillion digital tokens. As a result of public and private sales, the company was able to raise about $100 million from investors worldwide.

Although the tokens were released upon the completion of the sale, no product could be used with the Kins. Instead, as the SEC’s alleged, the Kin tokens were marketed as an investment opportunity promising an increasing value of tokens due to the rising market demand driven by the efforts of the company. Kik Interactive intended to keep three million Kin tokens for the company to profit from the trade of tokens on a secondary market along with the investors.

Under the Howey Test used by the U.S. Courts to define securities, any instrument designed for the person to invests his/her money into a common enterprise and expect profit solely from the effort of the promoter could be considered an investment contract, which is one form of the securities. The claims made by Kik Interactive in connection with the sale of its tokens led the SEC to believe that Kik’s ICO was the unregistered securities offering.

Kik Interactive, Inc. attempted to fight the charges at first but then lost a summary judgment in September of this year and agreed to settle with the SEC. As a result, the Kin tokens were found to be securities by the Court, and the company was ordered to pay a hefty fine of five million dollars and to comply with the other non-monetary requirements set by the final judgment.



Summarized by Katrina Arden
Attorney and founder of Blockchain Law Group
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IRS brings tax evasion charges against John McAfee

IRS brings charges for tax evasion against John McAfee
Simultaneously with the SEC, the IRS unsealed their charges for tax evasion and willful failure to file tax returns following the arrest of John McAfee in Spain. The charges relate to the same unlawful activities alleged by the SEC as well as to Mr. McAfee’s consulting work, speaking engagements, and selling rights to his life story for a documentary, for which he allegedly received income but failed to report it and pay income taxes.

The U.S. tax law requires U.S. taxpayers to file an annual income tax return regardless of their country of residence. Willful failure to file a tax return is considered a misdemeanor and can lead to a fine of not more than $25,000 or imprisonment of not more than one year, or both, for each count of violations. The IRS alleged that John McAfee did not file his income tax return from 2014 to 2018.

Moreover, the IRS alleged that Mr. McAfee deliberately directed his income to be deposited into bank accounts and cryptocurrency exchange accounts of other people. According to the IRS, Mr. McAfee also concealed his assets, including real property, a vehicle, and a yacht, in the names of others as an attempt to evade his tax liability. Tax evasion is a much more serious crime and is considered a felony. If convicted, Mr. McAfee can face up to a $100,000 fine or imprisonment for not more than five years, or both, for each count.

John McAfee appears to be fighting all charges brought against him by the U.S. authorities.



Summarized by Katrina Arden
Attorney and founder of Blockchain Law Group
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John McAfee, a famous ICO supporter, is charged by the SEC​

John McAfee, a famous ICO supporter, is charged by the SEC
John McAfee, a legendary computer programmer, who got involved into the blockchain industry during an ICO wave and heavily promoted various tokens, was charged by the SEC for nondisclosure of payments he received for such promotions.

As many blockchain market participants know, John McAfee was very vocal about investing into tokens, supporting, endorsing, and marketing a number of ICOs in his Twitter account and at various conferences. He appeared to be impartial and independent. According to the SEC findings, Mr. McAfee was paid over $23 million in digital assets for such promotions, which he denied. Under the U.S. law, the investors are entitled to know whether the promoters are being compensated by the issuers of securities. Also, the SEC alleges that John McAfee made other false statements misleading the public about his personal investments into certain tokens and his advisory role in some ICOs.

In addition, the SEC claims that John McAfee was also involved in another scheme of touting certain tokens he had accumulated on Twitter and then selling those tokens as prices rose. This was essentially a "pump-and-dump" practice, which is illegal under the U.S. securities law.

As a result, the SEC charged John McAfee and his bodyguard Jimmy Watson Jr., who assisted him in these cases with violating antifraud provisions of the federal securities laws, McAfee with violating the anti-touting provisions, and Watson with aiding and abetting McAfee’s violations. The SEC seeks permanent injunctive relief, conduct-based injunctions, return of allegedly ill-gotten gains, and civil penalties in addition to bar McAfee from serving as a public company officer and director.

The complaint against John McAfee and Jimmy Watson, Jr. was filed in the U.S. District Court for Southern District of New York.



Summarized by Katrina Arden
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$1.2 billion has to be returned to investors by Telegram

$1.2 billion has to be returned to investors by Telegram
The SEC obtained a court approval of its settlement with Telegram Group, Inc. and its subsidiary TON Issuer Inc. ("Telegram") on charges that ICO of the token Gram violated the U.S. securities laws. Under the settlement, Telegram agreed to return more than $1.2 billion to investors and pay a whooping amount of civil penalty equal to $18.5 million.

In 2018, Telegram had an ICO raising funds to finance its operations and develop its own blockchain. The tokens were not available to everyone but rather to a few sophisticated investors. In its complaint, the SEC alleged that Telegram sold approximately 2.9 billion Gram tokens to 171 investors worldwide in an effort to raise capital to finance its business. This turned out to be the largest ICO to this date. However, the sale was conducted without necessary disclosures and registration, in violation of the U.S. securities law.

One of the biggest concerns of the SEC was unlawful distribution of Grams to the secondary market. "Our emergency action protected retail investors from Telegram's attempt to flood the markets with securities sold in an unregistered offering without providing full disclosures concerning their project," said Lara Shalov Mehraban, Associate Regional Director of the New York Regional Office.

The complaint was filed in the U.S. District Court for the Southern District of New York. Telegram attempted to fight the SEC arguing that the sale of Grams did not fall under the U.S. securities laws and regulations.

The interesting fact about this case was that the U.S. Commodity Futures Trading Commission (CFTC) had provided its own opinion letter reminding everyone that it defined digital currencies as commodities. However, it stated that commodities and securities are not always mutually exclusive. The CFTC also refrained from expressing any view on application of the U.S. securities law to Grams.

The Court ruled in favor of the SEC and issued a preliminary injunction blocking Telegram from distributing its Gram tokens to the purchasers. Also, it denied the company's request to exclude non-U.S. token holders from the Order.

Telegram appealed but eventually agreed to a settlement with the SEC without admitting or denying the SEC's allegations. As a result of the settlement, Telegram was ordered to disgorge $1,224,000,000 of gains from the sale of Grams and pay a civil penalty of $18,500,000 making it the largest amount in token related enforcement actions brought by the SEC.



Summarized by Katrina Arden
Attorney and founder of Blockchain Law Group
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Another CA company is ordered to return money to investors

Another California company is ordered to return money to investors
The SEC continues to investigate companies that conducted ICOs in 2017 and 2018. Recently, the SEC brought charges against BitClave PTE Ltd., which had an ICO of the Consumer Activity Tokens (Cat) token in the third quarter of 2017. According to the SEC, BitClave sold Cat tokens to approximately 9,500 investors, some of whom were in the U.S.

As was referenced in the BitClave's offering documents, the company was planning to use the ICO proceeds to develop, administer, and market its blockchain-based search platform for targeted consumer advertising. In addition, in its Cat marketing campaign, BitClave PTE Ltd. emphasized its expectation that the tokens would increase in value, and took steps to make the tokens available for trading on secondary exchanges after the ICO. All of the above made Cat token a security, which sale should have been registered with the SEC.

BitClave decided to wind down its operations, delist Cat tokens, and agreed to settle the charges and pay disgorgement of $25,500,000, prejudgment interest of $3,444,197, and a penalty of $400,000. BitClave also agreed to transfer all remaining Cat tokens in its control to the fund administrator for permanent disabling, publish notice of the order, and request removal of Cat tokens from all digital asset trading platforms.



Summarized by Katrina Arden
Attorney and founder of Blockchain Law Group
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