The Solidus Brief: Digital Asset Market Surveillance, Compliance & Regulation News - July 2019 -

All the crypto compliance news you need to know from the past few weeks

Top Headlines:

• FATF’s guidelines were officially adopted by G20 nations, leading to intensified discussion of regulation and compliance in the crypto space.
• For the first time, the U.S. SEC approved a security token offering under regulation A+. The approval of Blockstack's $28 million STO means it will be available for non-accredited investors and is seen as a potential harbinger for additional STOs.
• According to research by major investment house Fidelity, 22% of institutional investors are already engaged with Crypto. Financial advisors (74%) and family offices (80%) view the characteristics of digital assets most favorably.

But First, a Few Solidus Updates

• “Digital assets are a fuel driving innovation in finance.” If you missed it, listen to Solidus CEO Asaf Meir’s Coindesk Webinar on crypto market surveillance and why it matters.
• Lior Prosor of Hanaco Ventures, Solidus Labs’ lead investors, on why they believe crypto-native compliance tools are critical for the industry’s growth.
• In London’s CryptoCompare summit and in Tel Aviv’s FinTech Junction conference - Solidus joined industry leaders like Binance and Kraken to discuss market integrity challenges and how to improve transparency.
• We are delighted to announce the official opening of our Tel Aviv offices next month.Nimrod Hauser, Solidus’ new Head of Data, will also serve as GM in Israel. Solidus is currently hiring for various positions - see our careers page to explore opportunities.

Regulation, Legislation and Enforcement

• FATF adopted by G20: During their annual summit in Japan, G20 nations officially welcomed the Financial Action Task Force guidelines for digital assets, including a requirement for exchanges to share customer data known as the “travel rule.” The decision is  viewed as one of the biggest regulatory hurdles for crypto exchanges so far, and will, among other implications, compel countries to register and supervise cryptocurrency-related firms while requiring detailed checks on customers and reports on suspicious transactions. While the move raised concerns among crypto exchanges, many regulators, including U.S. Treasury Secretary Steve Mnuchin,welcomed the guidelines.
• In the aftermath of Facebook’s announcement that it would issue a crypto currency called Libra, supported by major backers like Visa, MasterCard, PayPal and Uber, regulators are raising concerns: Germany’s BaFin calls for setting digital asset standards to accommodate such developments and the U.S. Senate Banking Committee scheduled a hearing to examine potential risks. In the meantime, Facebook’s move is reportedly pushing China to consider issuing its own digital currency. This week, U.S. Fed Chairman Jerome Powell expressed "serious concerns."
• United States and Canada:
• The Commodity Futures Trading Commission allows LedgerX to physically settle bitcoin future contracts for both institutional and retail clients. The agency also cleared crypto derivatives provider ErisX to offer future contracts. Binance is expected to follow suit.

• For the first time, the Securities and Exchange Commission approved a security token offering (STO) under regulation A+. While STOs have been previously issued by various companies under Regulation D, Blockstack's $28 million offering is the first to receive Reg A+ approval, opening it to non-accredited investors. Getting the issuance approved reportedly took 10 months and cost Blockstack $2 million. The approval is a potential harbinger for additional Reg A+ STOs.

• The CFTC enforces a $360,000 fine against two fraudsters who impersonated the regulatory agency to steal Bitcoin from users. Simultaneously CFTC filed a lawsuitagainst Control-Finance Limited for misappropriating bitcoin worth $147 million from 1,000 customers.

• Beginning June 2020, crypto exchanges in Canada will be legally required to registerwith the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC).

• The SEC opened the public comment period for a potential rule-change that would enable authorizing Wilshire Phoenix and NYSE Arca’s proposed Bitcoin-ETF.

• The U.S. Department of Justice charged a Swedish suspect with securities fraud that included accepting payment in Bitcoin.
• Following their failure to acquire BitLicense and asking NY clients to withdraw funds,Bittrex expands its digital asset trading platform to Liechtenstein.
• Following reports that FINRA is holding off on roughly 40 crypto broker-dealer applications, America’s securities industry self-regulatory organization released a joint statement with the SEC clarifying custody requirements.
• FINRA fined and suspended an ex-Merill Lynch investment adviser over undeclared crypto mining activities.
• U.S.-based exchange Gemini announced plans to apply for a broker dealer license as part of an effort to achieve Alternative Trading System status.
• Binance will exclude U.S. users from trading, while it works towards opening a U.S.-based exchange with FinCen-registered partner.
• For a survey of additional enforcement actions currently taking place in the U.S., check out Law360’s analysis.
• Asia:
• Japan: Line Corp, provider of Japan’s largest messaging app, is reportedly nearing approval for a crypto exchange that will serve its 80 million users. Simultaneously, the Japanese FSA charges Fisco, owner of crypto exchange Zaif, with “legal violations,” and for ignoring “the importance of legal compliance.”
• South Korea: A major bank says it will crack down on accounts linked to crypto exchanges, while five crypto exchanges respond to regulatory demands and increase their liability for loss of user funds.
• China: Major Chinese Financial News Provider quietly adds crypto index. While  crypto is still largely illegal in China, a recent Deloitte survey showed 73% of Chinese enterprises see blockchain as a top-five strategic priority.
• A United Arab Emirates crypto exchange receives initial regulatory approval from authorities.
• Singapore’s tax agency plans to remove goods and services taxation from cryptocurrency transactions.

‍Europe:

• After IMF Managing Director Christine Lagarde was tapped for the presidency of the European Central Bank, many wonder whether her comments back in April, alleging that crypto assets are “shaking the system,” may mean the EU will soon be more inclined to accommodate digital assets.
• In a widely lauded speech, Bank of England Governor Mark Carney called for enablement of the digital economy that could support new finance, and laid out the United Kingdom’s plans to support this process.

• Europol, British and Dutch police arrested six individuals for cloning a prominent crypto exchange in order to steal $27 million from its users.
• UK based broker TP ICAP will soon begin selling CME’s Bitcoin futures.
• UK regulators approve Prime Factor Capital as the first crypto hedge fund approved as a full-scope alternative investment fund manager.

Elsewhere:

• Brazil requires crypto exchanges to inform regulators about user transactions; The country's 5th largest bank plans to use Tezos Blockchain for STOs worth as much as $1 Billion.

Our take:

Regulation is gradually moving from talking and deliberation to action, with significantly more enforcement  cases, formation of international standards like FATF's guidelines and materialization of licensing regimes. As the stakes of non-compliance increase, so does the benefit of good behavior, due diligence and transparency. The result is increasing demand from institutional and retail investors for credible crypto services, which we at Solidus are experiencing as increased demand for crypto-native compliance and market surveillance tools.

Market Integrity and Manipulation Concerns

• During its annual summit, CryptoCompare released an extensive study of crypto market integrity concerns, and proposed a new methodology to rank exchanges. The report also includes due diligence recommendations. Among the key findings:
• Volume-based rankings can be highly misleading. Instead, the report suggests a “Trusted Volume” framework whereby investors can calculate market volumes based on their risk appetites
• There is a positive correlation between due diligence scores and market quality scores
• There is a relationship between factors like the exchange’s funding, geographic location, MSB licensing, number of employees and market integrity rankings
• Measuring an exchange’s quality by focussing on trading patterns is still very challenging
• A report by Alameda Research explores ways some exchanges are allegedly reporting fake volume, and concludes that close to 70% of volume traded in major arenas is manipulative. Some of the findings include:
• 68% of cryptocurrency trading volume is fake
• Trading volume for many exchanges showed clear evidence of wash trading
• Some exchanges are creating replicas of trading history, printing the same numbers delayed by a few seconds in order to present volume
• Some exchanges are sneaking in large, fake transactions amid a flurry of smaller ones
• Some exchanges are printing transactions that fall in the middle of the bid and ask prices

‍Our take:

The industry continually comes to terms with the disturbing levels of trade manipulation and the need for additional transparency. It’s increasingly clear new frameworks, tools and rules are necessary to measure and improve market integrity. We’re proud to be leading this effort - alongside companies like CryptoCompare - as co-chairs of Global Digital Finance’s Market Integrity Code of Conduct Working Group.

Adoption and Industry Growth

• Research by Fidelity Investments reveals strong indications of increased institutional involvement in digital assets and sheds light on investor preferences. 22% of institutional investors, according to Fidelity, are invested in digital assets already. Among institutional crypto investment firms, 72% are keen on investing in products that hold digital assets, while 57% choose to directly buy cryptoassets. Financial advisors (74%) and family offices (80%) view the characteristics of digital assets most favorably. Simultaneously, Fidelity’s international arm follows its U.S. entity in beginning to explore blockchain investments.

• Blockchain startups have raised a total of $822 million during the first half of this year.
• Bank of International Settlements Chief switches from criticizing crypto to acknowledging Central Banks will likely need to issue their own digital currencies.
• Goldman Sachs explores creating a digital coin after CEO David Solomon reiterates undeniable disruptive potential of blockchain and cryptocurrencies.
• Coinbase launches cryptocurrency debit card in Spain, Germany, France, Italy, Ireland, and Netherlands.
• The largest bank in South Korea, KB Kookmin, prepares to launch a digital asset custody offering.
• Crypto asset manager Bitwise partners with Swiss fintech startup to launch multi-crypto-based ETP attempting to assist non-U.S. investors in obtaining diversified exposure to the crypto markets.
• Xetra, a Deutsche Börse-operated trading venue, lists first blockchain company.

Other mainstream players increasing their engagement with blockchain and digital assets this past month include: Budweiser, Kodak, Apple, Microsoft, Target, US Federal Government, Visa, Amazon, Major Brazilian Bank Bradesco, General Motors, FDA with IBM, Walmart and Merck, The State of Rhode Island, Samsung, Japan’s 100 Major Businesses, Italy’s Banks, Salesforce, LVMH, Central Banks, Walmart China,Germany’s Political Parties, Google, and another 50.

Our take:

Interest from institutional investors and mainstream corporations in both digital asset and blockchain investments and integrations is growing at an accelerating pace, as the market is still getting over a prolonged bear market. A stable bull market may lead to growth and adoption becoming exponential.