Categories
Coindesk News

Block.one Failed to Decentralize EOS, Argues New Securities Fraud Lawsuit

A cryptocurrency investment fund has launched a class-action lawsuit against Block.one and EOS’ high command, arguing the “fraudulent scheme” failed to deliver on its primary promise of decentralization.

The Crypto Assets Opportunity Fund (CAOF), along with individual investor Johnny Hong, has accused Block.one, its CEO Brendan Blumer, CTO Dan Larimer, former chief strategy officer Brock Pierce and former partner Ian Grigg, of trying to “capitalize on the investor fervor for cryptocurrencies” in 2017 to host an illegal securities sale.

In a strongly-worded filing with the Southern District of New York, plaintiffs argue defendants purposefully misled investors and artificially inflated the EOS token price during the yearlong ICO, which raised a total of $4.1 billion between June 2017 and June 2018.

The filing reads: “This case arises out of a fraudulent scheme, fueled by a global frenzy over cryptocurrencies and unchecked human greed, to raise billions of dollars through sales of a cryptocurrency called EOS – an unregistered security – to investors in violation of the United States federal securities laws.”

Both COAF and Hong are seeking damages, to be agreed on by the court, from the defendants.

See also: On EOS Blockchain, Vote Buying Is Business as Usual

The suit, which was filed on Monday, is comprised of six counts. These include well-worn accusations, such as Block.one aggressively marketed its token sale in the U.S. without first registering it with the Securities and Exchange Commission (SEC).

But the case’s linchpin is the accusation Block.one and its representatives made “dozens of materially false and misleading statements” about EOS, especially in attempts to promote it as a superior new type of decentralized protocol.

In the filing, plaintiffs say EOS was always publicly described as decentralized and that this formed a crucial part of the whitepaper and broader ICO pitch.

But, they claim, this turned out to be false as soon as the protocol launched. It was the 21 block producers (BPs) who really controlled the ecosystem, rather than the community itself, the filing reads. Key parts of the governance system, like the arbitrator, who could reverse and freeze transactions at will, were never disclosed at the time of the sale, the plaintiffs claim.

As proof that EOS was not the decentralized protocol investors had been led to believe, the filing cites a statement Pierce made in 2019 – after he had left Block.one – when he claimed EOS was effectively controlled by a “Chinese oligarchy.”

“Block.one did not have the ability to create a decentralized EOS blockchain,” the suit concludes. The plaintiffs say the failure to deliver on one of the sale’s key promise – as well as the costly Voice pivot – has had a negative impact on the EOS token price, which materially harmed investors like themselves.

See also: Block.one Plans to Start Voting on EOS, the Blockchain It Birthed

CAOF is an Illinois-based pooled fund, that was set up in 2017 under the umbrella of Victoria Capital – a blockchain specific investment and advisory fund. There is very little public information about individual investor Johnny Hong available, besides the fact that he resides in Solvang, California.

It isn’t clear when CAOF bought into the EOS ICO or for how much, although a Medium post by CEO Brandon Elsasser, who is also Victoria Capital’s chief investment officer (CIO), said in a July 2018 update that the fund had forsworn further ICO investing as it presented more risk than was deemed prudent.

Block.one reached a settlement with the SEC last September, agreeing to pay $24 million in damages for running an unregistered securities sale, in exchange for a waiver on the legal restrictions that would usually be applied.

At the time, SEC Division of Enforcement co-director Steven Peikin said in a statement that Block.one had failed to provide investors with the information typically included in a securities sale.

Considering the $24 million penalty represented 0.58% of the initial raise, some criticized the settlement as little more than a slap on the wrist. Earlier this year, investors filed another complaint requesting damages against Block.one after participating in the token sale.

Disclosure Read More

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Source link

Categories
Coindesk News

DTCC Considers DLT for Securities Trading in Twin Studies

Depository Trust & Clearing Corporation (DTCC), a giant of financial markets infrastructure, is studying whether distributed ledger technology (DLT) could accelerate its processing of securities.

DTCC revealed two projects Monday aimed at integrating DLT with capital markets: Ion, a proof-of-concept alternative settlement service and Whitney, a security token method of private securities issuance and exchange.

Ion in particular envisions a radical future for a company whose already-speedy clearing and settlement pipework routes nearly $2 quadrillion in securities every year – almost the entirety of the U.S. securities market. 

Perhaps digitized assets might flow smoother with DLT, DTCC opined in a project brief. It  argued that improving the settlement cycle would have cascading benefits for market participants.

Whether DLT is the right answer appears to be a matter DTCC has not yet fully addressed. 

By DTCC’s own telling, Ion is a proof-of-concept that has not yet proved its core concept: that DLT can function at scale.

“To effectively convey proposed business concepts, UI/UX was prioritized over a scalable architecture,” DTCC said in the brief. Later in the brief, it said it is looking for the “appropriate technical stack” for Ion. 

Much closer to functioning prototype – though still likely far from implementation – is DTCC’s Whitney. This project tries to broach the haphazard private securities market with security tokens.

Regulation D securities are not subject to the same rules or party to the same trading infrastructure as their public counterparts. That makes the markets for them far messier, according to Jennifer Peve, Managing Director of Business Innovation at DTCC.

“The private markets are ripe for increased levels of automation and lack much of the infrastructure that has supported the public markets for decades,” Peve said in a statement. “Project Whitney presents an exciting opportunity to leverage emerging technologies and develop completely new solutions from the ground up.”

DTCC hypothesized that a comprehensive platform security tokens could provide a better private security marketplace. Issuance, distribution and exchange would happen on-chain – as would compliance checks – and everything would also be stored in off chain records, too. 

Whitney ran this concept for 12 weeks on the public ethereum network. In that time, it hit trouble spots associated with high network activity – a scaling issue that Ion, its counterpart, has not yet faced. 

Still, Whitney’s dry-run appears to have given DTCC a roadmap. It will offer test APIs to partner firms and “iterate the prototype” for more blockchains, including Hyperledger Fabric and R3 Corda.

Disclosure Read More

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Source link

Categories
Coindesk News

California Assembly Considers Exempting Digital Assets From State Securities Law

A key lawmaker in the California Assembly has proposed exempting a narrow set of digital assets from the state’s definition of corporate securities. 

The proposal, introduced Tuesday as an amendment to legislation first submitted by Majority Leader Ian Calderon (D-57), would free “digital assets” that are “presumptively not an investment contract” from the definition of security and all the regulatory baggage that label carries.

Exactly how to separate digital assets from securities law has been a resoundingly inconclusive debate in the U.S., where officials define the vast ecosystem of crypto products in different, sometimes contradictory ways from one agency to the next. Those differences have led to multiple court battles over the applicability of the “Howey test” to digital assets

Calderon’s legislation tries to end that debate, according to Michael Magee, a legislative aide.

“It addresses one of the most common instances of ambiguity with cryptocurrency and the law: how to determine if a digital asset is an investment contract, and therefore subject to securities laws,” Magee said to CoinDesk in an email.

If passed, Calderon’s legislation set what appears to be a clear framework for determining whether digital assets are investment contracts – at least on the state level.

The asset must not be acquired in exchange for payment, fiat or otherwise; it must be used on a “fully operational network” for a “consumptive purpose;” and its value “does not rely on the managerial effort of others” (a key feature of the Howey test).

Within that last point, the legislation points to decentralized consensus as evidence of whether a digital asset is independent from an “identifiable person, project team, or management entity” that would otherwise contribute “managerial efforts.” Network-led software changes and proof-of stake voting rights must be present.

Disclosure Read More

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Source link

Categories
Coindesk News

Securitize Builds Digital ID Service in Hopes of Creating Industry Standard

Securitize is rolling out a common identification system for its customers that it hopes will streamline the know-your-customer (KYC) process for all participants in the security token ecosystem.

The company announced its new identification service, Securitize ID, Thursday, saying any individual who completes their KYC process with the transfer agent can use the same information when trying to onboard with any other company which adopts the service.

Securitize ID will be a standard that other companies working on security token issuances can adopt, said Carlos Domingo, Securitize’s CEO and cofounder.

“Within the ecosystem of the companies we work with for participating in a securities offering, there are issuers, there are transfer agents like us, there are custodians and ideally we can all agree on a common ID that is shared across all of these institutions that is compliant,” he told CoinDesk in a Zoom call.

Essentially, a customer can sign up to Securitize, submit their KYC documentation, and be assigned an identifier. These customers or businesses will be monitored against regulatory watchlists, such as the U.S. Office of Foreign Asset Control Specially Designated Nationals sanctions list. If a customer wants to sign up to another company that accepts Securitize ID, they can use a single click to submit the same KYC documentation to that new company, rather than go through the process again.

Securitize has been working on the new system for close to six months, Domingo said. Securitize’s system also automates much of the process, rather than have an employee manually input details, which can take days, if not weeks.

This manual input, used by some traditional financial firms, is one of the reasons the KYC process can take an extended period of time Domingo said, pointing to a Refinitiv (formerly Thomson Reuters) survey which found financial institutions spend 26 days on average onboarding new clients.

“We had the basic blocks because we were already doing ID for each individual issuer and the first step was to bring issuers onto the same platform,” he said. “That technology gave us a great advantage because it used to take a week or two [to conduct KYC] and now it takes like two seconds.”

Constantly updated

Securitize ID will be an actively managed service, Domingo said. If a customer’s documents – for example, their passport – expire, the company will reach out to the individual to add an updated document.

This keeps the data fresh, Domingo said.

Even though the service uses a blockchain, if a customer wishes to move on, Securitize can delete their KYC information, Domingo added.

“We only keep non-personally identifiable information [on the blockchain] because it’s hard to delete things,” he noted. The company itself will store the KYC information, using the same security protocols it already uses when storing customer information, but will assign each customer a number, which is what gets stored on a blockchain.

Securitize ID is part of the company’s efforts to digitize securities

Transfer agents traditionally conducted a lot of their processes in-person, but this is likely to change amid the ongoing COVID-19 pandemic, he said. Securitize did not need to stop or slow down operations when its employees went remote, but this may not have been the case for traditional transfer agents.

“In many cases things are manual or paper based or face to face just because of legacy [reasons] but not because of regulation or law or anything, so once people take the step of moving to digital I don’t see why they’ll go back to not digital,” he said.

Disclosure Read More

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Source link