Two cryptocurrency startups have agreed to register their initial coin offering (ICO) tokens as securities after settling charges with the U.S. Securities and Exchange Commission.

The SEC’s Friday announcement centered on two firms: CarrierEQ Inc., also known as Airfox, and Paragon Coin Inc., both of which conducted token sales last year. Airfox raised $15 million through its sale, while Paragon raised $12 million, according to statements.

The U.S. securities regulator contended that neither startup registered their ICOs as securities offerings, and neither qualified for registration exemptions. In addition to registering their tokens as securities, both companies will refund investors, file periodic reports to the SEC and pay $250,000 apiece in penalties.

The SEC’s statement noted that these two cases are the SEC’s “first cases imposing civil penalties solely for ICO securities offering registration violations.”

SEC Enforcement Division co-director Stephanie Avakian said that the agency has “made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities.”

She added:

“These cases tell those who are considering taking similar actions that we continue to be on the lookout for violations of the federal securities laws with respect to digital assets.”

The release further referenced the Munchee ICO, which the regulator halted last December. Like Airfox and Paragon, Munchee agreed to refund investors in its $15 million token sale, though the SEC did not impose additional fines at the time.

Friday’s announcement comes on the heels of the SEC revealing settled charges against Zachary Coburn, founder of the decentralized exchange EtherDelta, with running an unregistered securities exchange.

At the time, an individual familiar with the SEC’s thinking noted that the regulator is likely to focus increasingly on token trading platforms.

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Dutiful CCN readers may recall this journalist’s questioning of the Paragon ICO over a year ago. Paragon responded to that article with legal threats, as noted in the author’s subsequent analysis of the initial coin offering in question. Now that some time has gone by, and the whole market capitalization of Paragon is about a third of what the company raised during the ICO, the government has stepped in, knocked heads, and forced some changes within Paragon.

According to a press release today from the Securities and Exchange Commission, both Paragon and another company doing business as Airfox (officially registered as CarrierEQ) have reached settlements with the agency for failure to register their tokens as securities or their token sales as securities offerings. It is a crime in the United States since 1934 to sell virtually anything that can resemble an investment contract without first registering with the SEC or applying for an exemption. The Securities Act of 1934 was one of many pieces of legislation designed to prevent future crashes on the order of the crash of 1929, which led to what is historically referred to as the “Great Depression.”

Each firm has agreed to a settlement of $250,000 and several important items of responsibility. First and most notable, all affected investors in either company have an opportunity to request a refund.

Source: Coinmarketcap.com

Given that Paragon, for example, sold $12 million in tokens but PRG has a sum market capitalization of not quite $3,000,000, it would seem there will be people interested in pursuing as much. Whether this leads to bankruptcy for Paragon, time will tell, but surely they’d prefer that to the various other penalties a government inquiry can bring on (such as jail time.)

The SEC press release on the subject reads:

“The orders impose $250,000 penalties against each company and include undertakings to compensate harmed investors who purchased tokens in the illegal offerings. The companies also will register their tokens as securities pursuant to the Securities Exchange Act of 1934 and file periodic reports with the Commission for at least one year. Airfox and Paragon consented to the orders without admitting or denying the findings.”

The SEC settlement documents illustrate a somewhat-disconcerting accuracy on the part of the agency, which has only previously prosecuted one non-fraud ICO case (a company called Munchee which simply backed out upon contact, giving all the funds back). Point 17 in the Paragon document illustrates a familiarity with token technicalities:

“PRG tokens were distributed to purchasers on October 22, 2017, on the Ethereum blockchain using the ERC-20 protocol.”

It seems that Ethereum tokens are not just for eccentric investors anymore.

SEC Enforcement Co-Director Steven Peikin believes that its enforcement actions against Airfox and Paragon will help stimulate the registration of other US-based ICOs in advance of any further non-fraud prosecution, saying:

“By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws.”

Twitter was abuzz with the news at the time of writing, with many ICO skeptics taking a victory lap.

nic carter@nic__carter

Landmark case today. This is going to happen hundreds and hundreds of times in the next 2-3 years until all the ICOs are gone.

View image on Twitter

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Pure Bit, a cryptocurrency exchange in South Korea, has allegedly pulled an exit scam, disappearing with more than $30 million worth of user funds.

On Nov. 9, as BlockchainROK, a trusted news source in South Korea reported, the management team of Pure Bit started to delete social media handles of the exchange and kicking users out of KakaoTalk chat groups.

The official KakaoTalk account of Pure Bit was renamed to a formal phrase in Korean, which translates to “I’m sorry.”

Screenshot of Pure Bit’s KakaoTalk group shared by HanKyung

Initially, around 13,000 Ethereum (ETH) was moved from the address of Pure Bit. Over the last 24 hours, nearly $10 million worth of ETH was moved from Pure Bit’s address.

$30 Million Stolen

According to HanKyung, a mainstream business-focused mainstream media outlet in South Korea, Pure Bit executed an exit scam with more than $30 million in user funds.

Earlier this year, Pure Bit raised $30 million in an initial coin offering (ICO) to create a cryptocurrency exchange. Within months since its token sale, the team behind the token sale disappeared with all of the funds raised during the ICO.

Pure Bit tried to send a portion of the stolen user funds to Upbit, the second largest cryptocurrency exchange in the local market. But, after discovering that the funds from the scam were sent to the exchange, Upbit disabled the account operated by Pure Bit and froze the funds.

Speaking to HanKyung, an expert in the local cryptocurrency sector said that with proper ICO regulations and policies in place, the exit scam could have been prevented.

“The case could have been prevented if the government had implemented proper guidelines and regulatory frameworks related to ICOs. If the government does not establish proper regulations in the short-term, more scams in the local ICO sector could occur.”

In an exclusive interview with CryptoSlate, BlockchainROK founder Heslin Kim stated that the government has not decided whether to completely ban out ICOs or regulate the market.

Kim suggested that, as local publications in South Korea have reported, the government will likely release a statement regarding the legalization or the regulatory state of the ICO market by the end of November.

“These kinds of exit scam scenarios unfold in an unregulated market. Korean legislation has been in a stalemate as to whether or not to fully ban ICOs for over a year now, and we are likely to hear the verdict by the end of November. This will not be a beneficial case study for the pro-blockchain party. However, there is still light in the darkness. STO policy discussions have begun recently and this falls in line heavily with what regulators have been saying is necessary. Is it the decentralized, trustless landscape we all thought would result from the fiat to crypto flippening? No, clearly not, but is it a step in the right direction for the long game? We’ll see.”

Second Exit Scam in a Month

Last week, CryptoSlate reported that MapleChange, a small cryptocurrency exchange in Canada, also pulled an exit scam.

Minor Crypto Exchange Pulls Off Exit Scam, Steals All User Funds
Related: Minor Crypto Exchange Pulls Off Exit Scam, Steals All User Funds

The fraudulent operation of Pure Bit is more of an ICO fraud than a cryptocurrency exchange exit scam, but given that the funds were provided to the company to launch an exchange, Pure Bit has been categorized as a cryptocurrency exchange scam by local investigators.

It remains uncertain whether government regulation will improve the ICO ecosystem or prevent fraudulent operations. Investors will need to conduct proper due diligence before investing in projects, especially ICOs that have complete control over the funds that are sent by investors.

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“Big Four” auditor Ernst and Young has launched the prototype of a system that enables secure and private transactions to take place on the Ethereum (ETH) public network, according to a press release Oct. 30.

The system, dubbed EY Ops Chain Public Edition (PE), uses zero-knowledge proof (ZKP) technology, an alternative algorithm for authenticating distributed ledger entries, in which transacting parties provide proof of validity, but all other information remains encrypted, including their identities.

The prototype is aimed at enterprises that wish to keep their transaction records private without having to resort to a permissioned, private network. Paul Brody, EY’s Global Innovation Leader, Blockchain, has outlined that:

“With zero-knowledge proofs, organizations can transact on the same network as their competition in complete privacy and without giving up the security of the public Ethereum blockchain.”

The press release underscores that the $20 billion+ market cap Ethereum network offers enterprises a level of liquidity that “dwarfs” that of any existing permissioned blockchain, as well as removing the need for building an in-house private blockchain from scratch.

EY says it aims to “spur” enterprise blockchain adoption by supporting “both payment tokens and unique product and services tokens that are similar to the Ethereum ERC-20 and ERC-721 token standards.” Its offering extends to a prototype for a Private Transaction Monitor that captures transaction history for subsequent review.

Both EY Ops Chain PE and the EY Blockchain Private Transaction Monitor have reportedly been developed by EY blockchain labs in London and Paris and are still “with patents pending.” They are slated to be ready for full-scale product launch by 2019, the press release states.

Ethereum’s developers have long been working to support zero-knowledge proofs on the network, with Vitalik Buterin revealing in fall 2017 that a network upgrade had successfully verified a zero-knowledge “snark” proof on the Ropsten testnet.

Earlier this month, Dutch multinational banking and financial services corporation ING announced the release of its own more generalized open source blockchain tool, dubbed Zero-Knowledge Set Membership (ZKSM), which also aims to enable the validation of data on a blockchain with increased privacy.

Also this month, Ernst and Young released a stark report that analyzed data for the top initial coin offerings (ICOs) that raised capital in 2017, concluding they had “done little to inspire confidence” one year on.

 

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Hong Kong’s securities regulator issued a statement setting out guidelines for funds dealing with cryptocurrency Thursday, Nov. 1, saying it could move to formally regulate exchanges.

In what it called “guidance on regulatory standards,” the autonomous Chineseterritory’s Securities and Futures Commission (SFC) set in motion a series of steps that chief Ashley Alder hinted would culminate in a formal regulatory environment.

Hong Kong differs significantly in its approach to cryptocurrency from mainland China, with cryptoasset exchange and related activities legal, though formal regulation is pending.

“The market for virtual assets is still very young and trading rules may not be transparent and fair,” Bloomberg quoted Alder as saying during a fintech forum Thursday:

“Outages are not uncommon as is market manipulation and abuse. And there are also, I am afraid, outright scandals and frauds.”

The latest proposals pertain to any fund managers investing more than 10 percent of their holdings in cryptocurrency, with entities serving exclusively professional traders able to join a sandbox scheme designed to give more room to develop new products and services.

For others, a licensing process will require entities to inform the SFC about their business practices.

The statement reads:

“In order to afford better protection to investors, the SFC considers that all licensed portfolio managers intending to invest in virtual assets should observe essentially the same regulatory requirements even if the portfolios (or portions of portfolios) under their management invest solely or partially in virtual assets, irrespective of whether these virtual assets amount to ‘securities’ or ‘futures contracts.’”

Cryptocurrency exchanges could also fall under the the SFC’s supervision more directly in future.

“…It is proposed that the standards of conduct regulation for virtual asset trading platform operators should be comparable to those applicable to existing licensed providers of automated trading services,” it adds.

Hong Kong’s sharpening of its regulatory oversight comes while more and more jurisdictions move to do the same, as Bitcoin and major altcoin markets stabilizeand a general acceptance of their longevity begins to crystalize.

Last week, Taiwan announced it would release dedicated rules governing Initial Coin Offerings (ICOs) by June next year, having previously chosen not to regulate the sector.

 

This post credited to Cointelegraph  Image source: Cointelegraph

While delivering her keynote at the 2018 Korea Blockchain Expo, chairperson of The National Assembly Special Committee, Lee Hye-hoon, said the blanket Initial Coin Offering (ICO) ban will be lifted in the “near future”.

Even if this is tentative, odds are South Korea will legalize the controversial fund-raising model as early as November 2018 when government representatives meet to decide on the matter “based on results of the investigation by end of October” according to the head of Government Policy Coordination, Hong Nam-ki, as reported in local media.

The Effect of Korea’s September 2017 ICO Ban

As blockchain technology takes center stage, South Koreans continue to embrace and invest in digital assets. As such, they are one of the few crypto bright spots with high adoption rates. Even though the excitement around cryptocurrencies and digital asset investment is palpable, government officials are still cautious. Before implementing a market wide ICO ban back in September 2017, it had warned that the speculative mania around Bitcoin and similar cryptocurrencies was dangerous if investment or trading is done without due diligence.

However, the stateless status of digital assets is appealing and despite intervening measures, like mandating exchanges to implement KYC rules as the government crackdown on money laundering and other illegal activities, South Koreans are avid international investors of blockchain related startups. Besides, because the law doesn’t restrict South Koreans to buying coins or tokens, huge trading volumes continue to churn out from South Korea’s exchanges as Coinone, Bithumb and UpBit. These are three of the world’s largest cryptocurrency exchanges, currently planning to set shop in other crypto friendly states as Singapore and Thailand.

It is this potential loss of business as exchanges and blockchain startups migrate and crowd-fund in other jurisdictions that is causing policy makers to shift their position and campaign for the reversal of September 2017 ban of ICO under new set of conditions that all coin issuing projects crowd fund but comply with tight investor protection requirements.

The Legalization Drive

The group of 10 legislators led by Hong Eui-rak, who is also the member of the ruling Democratic Party of Korea, is pushing for a new proposal allowing public research organizations and centers to issue tokens under the tight supervision of the Financial Services Commission (FSC) and the Ministry of Science and ICT. But Choi Jong-koo, the chairman of South Korea’s FSC, is doubtful about cryptocurrencies and coin offerings. On October 11 during the parliamentary audit session of the FSC he said:

“The government does not deny the potential of the blockchain industry. But I think we should not equate the cryptocurrency trading business with the blockchain industry.”

He further emphasized his point saying:

“Many people say the Korean government should allow ICOs, but ICOs bring uncertainty and the damage they can cause is too serious and obvious. For these reasons, many foreign countries ban ICOs or are conservative towards them”

Regardless, the relentless drive by lawmakers is gaining traction and comments from Lee Hye-hoon asserts the general feel around the need to reverse the ban as the Special Committee, which she heads, responds to accusations that they are not doing enough to nurture and promote the development of the nascent blockchain technology in the country.

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Investing in the Initial Coin Offering (ICO) markets may soon become incredibly safe and easy for Taiwanese investors, according to a recent statement from the chairman of the country’s main securities regulatory agency.

The comments regarding the imminent introduction of an ICO regulatory framework came from Wellington Koo, the chairman of Taiwan’s Financial Supervisory Commission (FSC), who said that they are currently in the process of drafting ICO regulations that would make them as liquid and safe as retail stocks.

According to a report from the Taipei Times, who originally reported Koo’s comments, the FSC is hoping to have the regulation in place by June of 2019, and is currently in the process of implementing a review process and definitions for which types of token offerings would qualify to be regulated products.

Koo importantly noted that the regulations would exempt digital currencies and tokens that are used for purchases at specific retailers or organizations (like ones offered by gas stations, grocery stores, or airlines).

According to Chinese Nationalist Party Legislator, Willian Tseng, who spoke about ICO regulations right before Koo, the impetus for an ICO regulatory framework is the amount of fraud that currently exists in the industry.

Koo then noted that by regulating token offerings, investors will have access to better products, and fraud will diminish.

“The more we regulate, the more this new economic behavior wanes,” he said.

Regulatory Framework Specific to ICO Tokens, not Cryptocurrencies

Taiwan’s Securities and Futures Bureau Director-General, Tsai Li-ling, importantly noted that the ICO regulatory framework will be entirely separate from any potential regulations surrounding cryptocurrencies.

Tsai explained that “people often confuse an ICO with the trading of cryptocurrencies,” but further added that the government already has a framework to regulate token offerings that are securities, and that the new regulations would pertain more to tokens that aren’t directly defined as security tokens.

It is important to note that this is a positive development for the cryptocurrency and ICO markets, as this type of “do-no-harm” regulation is what many analysts see as being the next evolutionary step that takes the cryptocurrency markets to new highs.

Koo added that “the commission has no intention of curbing the creativity and productivity associated with cryptocurrencies if they are not used as securities.”

Another positive development for the token markets is the recent news regarding South Korea potentially lifting its 2017 ICO ban at some point this year.

While speaking at the 2018 Korea Blockchain Expo, Lee Hye-hoon, the chairperson of The National Assembly Special Committee, said that the ban may be lifted in the “near future.”

News surrounding Taiwan’s new regulatory framework for ICOs and South Korea’s potential ICO ban lift are incredibly positive for the token markets and could drive an influx of funds into well-regarded projects that will be compliant under the new regulations.

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More than two years after the collapse of The DAO thrust the Ethereum community into civil war, one of the bugs that caused that caused that black swan event continues to lurk in many smart contracts, waiting to be exploited by hackers.

That’s according to Emin Gün Sirer‏, a computer science professor at Cornell and the co-director of cryptocurrency research initiative IC3, who said that he has seen a variety of smart contracts that may be vulnerable to a “reentrancy” attack that allows a malicious user to drain ETH from a payment channel.

“BTW, I’ve seen other contracts like this one that implicitly trust the erc-20 tokens issued on top of their platform to not perform reentrant calls. I’m sure this isn’t the last episode of this bug,” he wrote on Twitter.

Sirer was commenting on the news that SpankChain, an adult entertainment startup whose platform runs partially on Ethereum smart contracts, had been hacked for nearly $40,000 worth of cryptocurrency over the weekend.

As CCN reported, the company said that the hacker used a reentrancy attack to siphon 1165.38 ETH out of the smart contract over a series of transactions. In short, the attacker used a malicious smart contract to trick the SpankChain contract into believing that the attacker could withdraw funds from the payment channel.

The firm explained:

“The attacker created a malicious contract masquerading as an ERC20 token, where the ‘transfer’ function called back into the payment channel contract multiple times, draining some ETH each time.”

ethereum

As both Spankchain and Sirer noted, the attack was similar to the one that crippled The DAO, a decentralized venture capital fund that long held the record for most funds raised by an initial coin offering (ICO).

Worth as much as $150 million at a time when the total market cap of ethereum was still far below $2 billion, The DAO held nearly 15 percent of the total ETH supply on June 17, 2016, when an attacker stole 3.6 million ETH — today worth nearly $815 million — by exploiting its vulnerable smart contract.

We all know what happened next: a series of futile attempts to recover the funds, the infamous chat room conversation, and the contentious hard fork that resulted in the creation of Ethereum Classic.

Now, more than two years later, Ethereum has largely put The DAO hack in its rearview mirror. The ethereum price, which plunged as low as $6 in the months following the hack, now stands at $230. Hundreds of blockchain startups have used Ethereum to raise billions of dollars through ICOs, and thousands of developers are building decentralized applications (dApps) that run on the platform.

However, though the consequences may not always be quite as serious as they were on that infamous morning in June 2016, the bug that permanently altered the cryptocurrency landscape appears determined to continue to rear its ugly head.

This post credited to ccn Images from Shutterstock

Lithuanian authorities held a seminar examining the “threats and potential benefits” of Initial Coin Offerings (ICO) to the country’s economy, a press releasereported Wednesday, October 3, amid an ongoing investigation into cryptocurrency trading habits.

The Financial Crime Investigation Service (FCIS) organized the meeting, which included representatives from government ministries, the central bank, and the General Prosecutor. According to the press release, the gathering revealed that Lithuanian processes “huge” turnover from crypto to fiat.

Antonio Mikulsk, head of the FCIS, said:

“Virtual currency has huge cash flows, but (there are) worries about converting them into dollars and euros as quickly as possible, (and) leaving virtual currencies as quickly as possible.”

Lithuania had pledged to create a formalized regulatory environment for cryptocurrency and related products, noting the benefits that come from adopting a hands-on approach to the industry.

Now, authorities are noting that a high ICO turnover volume — €500 million (about $576 million) over the past eighteen months — calls for tougher anti-fraud mechanisms.

“According to ICO figures, Lithuania is one of the world leaders and shows the highest, 305 percent, growth from all over the world,” FCIS deputy director Mindaugas Petrauskas added, quoting data from local consultancy firm Versli Lietuva.

The FCIS is simultaneously examining banks’ role in processing high-volume crypto-to-fiat transactions resulting from exchanges, noting that any single transaction over €80,000 (about $92,200) must be investigated, Lithuanian news outlet Delfi reported October 5.

Various regional banks are involved in the investigation, including SEB Bank, Swedbank, and Danske Bank. The sum total of crypto exchange transactions from 2017 to 2018 stood at €661 million (around $762 million) at the time the data became public, Delfi notes.

“Such a sum already causes a certain suspicion,” Petrauskas said about the €80,000 threshold, which involves around 500 individuals and 100 business entities.

 

This post credited to cointelegraph  Image source: Cointelegraph

Two cash-strapped football clubs are trying to circumvent financial issues by planning a tokenized crowdfunding round, reports the Times.

Newcastle United and Cardiff City, the English Premier League teams, are reportedly in talks with SportyCo, a decentralized sports investment & funding platform, to launch their Initial Coin Offering (ICO) round. SportCo has earlier partnered with Avaí Futebol Clube to raise them about $20 million via a public sale of AVAI tokens. The company is also a principal sponsor of Espanyol, the world’s top football team.

The partnership would enable the clubs to begin the sale of their private digitized tokens as securities/utilities. As interested participants purchase these tokens, they would either gain a particular stake in the clubs’ revenue or receive additional benefits for using the token on game-related purchases.

The Mag highlights the poor financial health of both Newcastle United and Cardiff City. While Newcastle United earlier has been named for losing profits off to bad managerial decisions – those taken by the club owner Mike Ashley – Cardiff City is facing a debt burden of over $150 million, bulk of which they owe to Vincent Tan, a Malaysian investment tycoon.

Cardiff even cut the wage bill to £20.6m, 18% lower than the previous year.

Both Newcastle United and Cardiff City have admitted that they are fighting for survival with lower budgets.

Sir John Madejski, a prominent figure in the Premier League once said that running a football club is not for faint-hearted; that one has to have deep pockets to run them smoothly especially when most clubs run at a loss.

Some common issues prevent football clubs from governing their finances properly. The wages of footballers are considered too high and paying unnecessarily hefty commissions to their agents adds up to the overall profit-deficit. Whatsoever, football continues to be a key part of a state’s – or even nation’s – economic strategies.

Understanding that running a football club cannot always be a one-rich-man show, football clubs are waking up to the possibility of going public. ICOs somewhat simplifies the process by allowing organizations to raise funds by selling digitized tokens that could either be used as proof-of-ownership or tools to avail discounts and offers from the issuers. The digitized crowdfunding method, so far, has appealed to startups that look to raise funds to build blockchain-enabled applications.

“Money raised from the crowd sale goes straight into club infrastructure which will stay with the club forever,” Marko Filej, SportyCo’s co-founder, stated. “With this initial money offer, we are opening a new chapter in football and the sports industry in general.”

This post credited to ccn Featured image from Shutterstock.