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SEC Intensifies Probe Into Biotech-Turned-Crypto Mining Firm Blockchain Riot

The U.S. Securities and Exchange Commission (SEC) has intensified its investigation into crypto mining firm Blockchain Riot, according to the firm’s latest 10-Q quarterly report filed August 14.

Riot Blockchain is a former biotech firm that changed its name to contain the word “blockchain” last year, seeing valuations skyrocket from $8 a share to over $40 as a result, according to a CNBC report. It is reportedly currently operating a crypto mining facility in Oklahoma City.

This week’s quarterly earnings report reveals that the firm received a letter from the SEC on July 30 indicating that the agency had begun an action “Pursuant to Section 8(e) [of] the Securities Act of 1933,” with particular scrutiny given to Riot Blockchain’s registration statements.

Under Section 8, if the SEC thinks that the registration statement contained “any untrue statement” or omitted any “material facts,” it may “issue a stop order suspending the effectiveness of the registration statement.”

Issuance of a stop order would mean that no shares of the company could be traded until the agency considers that deficiencies have been addressed. Reed Brodsky, partner at law firm Gibson Dunn, is quoted by CNBC as saying that:

“This SEC subpoena and the order do not appear to be the type of regularly issued subpoena in the normal course of the SEC’s oversight of registrants. The company has to take this very seriously. An adverse finding by the SEC could be devastating.”

Jake Zamansky of securities law firm Zamanksy LLC added that “the fact that the SEC division of enforcement is involved suggests they are considering securities fraud action against the firm,” CNBC reports.

As Cointelegraph previously reported, Blockchain Riot had already received an a SEC subpoena April 9, which the firm had brushed off at the time, saying that “many companies engaged in blockchain and cryptocurrency businesses have received subpoenas from the SEC.”

CNBC’s report notes that the April subpoena related to matters that included “the proper asset classification, applicability of the Investment Company Act [of] 1940, to the Company’s business and affairs and accounting treatment of its cryptocurrency.”

Shares of Blockchain Riot reportedly dropped by over 12 percent on Wednesday, CNBC notes.

This March, the SEC embarked on a widely publicized crypto probe, after chairman Jay Clayton pledged to increase scrutiny into firms that seek to “capitalize on the perceived promise” the blockchain buzz.

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PwC’s Pierre-Edouard Wahl: Blockchain Can Bring Positive Competition to Swiss Banking Space

Cointelegraph recently had the chance to speak with Pierre-Edouard Wahl, the head of blockchain digital services at PwC Switzerland, about the future potential of blockchain in the country.

Wahl, who noted that PwC Switzerland worked closely with main Swiss stock exchange SIX on their announcement of a future distributed ledger-based digital asset exchange, elaborated on his beliefs that crypto must be used in order to go mainstream enough to give people back control of their digital footprints.

This interview has been edited and condensed.

Molly Jane: Could you tell us how you got interested in the blockchain and cryptocurrency space?

Pierre-Edouard Wahl: I’m an engineer by schooling. I’ve been in the blockchain space for several years now, and I discovered a Bitcoin community that was very ideologically driven. The community drove me to the technology, not the other way around.

And so I decided to start a B2B Bitcoin exchange and got into some trouble, because at that time, it was very difficult. There was no clear regulation around exchange operations, and I looked for a big banking partner. Unfortunately, at the time, every time you mentioned Bitcoin, there were closed doors — so that did not work out.

But Credit Suisse asked me if I was willing to jumpstart their blockchain department, so I happily did. I spent three years at Credit Suisse and after that left, thought I was going to get back to the startup world, but really thought I had an opportunity at PwC to make an even bigger difference than in the startup world. Because we have a reach that is pretty amazing — a very high level of established business, executive suite. So, yeah, that was the exciting part.

MJ: When did you first hear about cryptocurrencies?

PW: The first time I heard about Bitcoin was in 2010. I dabbled with Bitcoin really for the first time in 2011, and got into the space full-time in 2012.

I feel like it is an industry that has such a huge potential, and I wish I could have spent more time there. But yes, relative to the existence of this industry, I have been there for a while.

MJ: Do you actually invest in the industry, do you own Bitcoin?

PW:  I am fully invested. I’ve asked my employers to pay me in crypto, but it hasn’t really worked yet.

I don’t only talk the walk, I try to walk the talk.

MJ: Since you say you have been investing in the market for a while, have you ever bought anything with Bitcoin? Like a pizza?

PW: I try to spend Bitcoin wherever I can. I see it as a way to spread the cost. So, yes, I have spent Bitcoin.

In the meetup in San Francisco — the SF Bitcoin-dev meetup — we used to organize what we call “Bitcoin bombs.” All of the participants go to a bar and ask if we can pay in crypto, in Bitcoin — and if we couldn’t, we could go to the next bar, until we found the first one that would accept it.

MJ: So how long did it take you to find a bar that would accept Bitcoin?

PW: San Francisco is pretty open, so generally it went pretty quickly. And we were a crowd, so they had a good incentive. And at that time, there was already BitPay, so if they wanted to receive dollars, they could easily get their dollars rather than Bitcoin.  

MJ: Do you have any fear that in the next 10 years Bitcoin will go to a million, and you’ll be that guy that spent his Bitcoin on a cocktail?

PW: Well, it will only go to a million if it gets used. So, it’s cool if the price goes up to a million, but it is not my priority. My priority, really, is to try to support a world where people have more sovereignty over their digital footprints, have more sovereignty in terms of freedom of speech, freedom of movement.

And public blockchains need a token for incentivizing various parties, and if one of those tokens goes to a million of dollars, it’s great for the investors and those tokens. But the million dollars is not the end goal — the million dollars is just the means to an end.

You can watch the interview here:

[embedded content]

MJ: Switzerland’s main stock exchange, SIX, recently announced that they would be launching a “fully regulated” cryptocurrency exchange next year. Could you talk about PwC Switzerland’s role in the announcement?

PW: We’ve been involved in that project and are very proud to be a partner in this new adventure for SIX. We hope that it is going to have impact not only on the Swiss financial place, but really on the global level.

I hope other jurisdictions will follow, if they do not precede us — it is possible that a few jurisdictions will launch on their own, I’d say, major exchanges, before we actually launch ours. But we are really excited about it. We think that it will definitely provide much easier access to the institutional investors. And we can’t — I can’t — wait to see it happen.

MJ: Are you expecting a lot of enthusiasm and energy from the Swiss community for SIX’s digital asset exchange?

PW: This project grew from demand from the industry. There was a lack of infrastructure in our financial service industry — like big banks, small banks — and a lot of demand from their clients. So it really came from the clients themselves who wanted to get into the space.

SIX basically belongs to the banks here in Switzerland, so it wouldn’t have happened without their approval — or the announcement wouldn’t have happened — without the approval of the major stakeholders and the major banks in Switzerland.

MJ: Do you think that SIX opening a digital asset exchange in Switzerland will help the country embrace more blockchain companies?

PW: Oh, we definitely hope so. Whether it will or not, I do not know. But hopefully banks will be more enabled with more infrastructure to actually start handling those new asset types. I do expect so, but I do not know for sure.

Right now, I think there is still more clarity needed from the regulators in order for banks to start jumping into it. Banks don’t necessarily have the right incentives to jump into space. Some obviously will find the right incentives, but I think banks have to start — rather than thinking in terms of efficiency gains — thinking in terms of new business models with this technology.

MJ: A Moody’s report from this spring found that Switzerland’s banking industry could be hurt by blockchain, due to the technology’s ability to make cross-border transactions faster and cheaper. Do you see a dichotomy in Switzerland embracing this new technology that has the potential to hurt its banking industry?

PW: I think that, on the contrary, it can boost up business. Then, the fees can be whatever the fees they decide to apply, as long as they are fair. And there is going to be competition amongst various parties who want to provide those kinds of services.

I actually think it will be an enabler. Yes, it might hurt their existing business, but that is often the case with the new technologies: It’s either you adopt them and you think differently about how those technologies are going to actually offer new solutions — as well as improve the existing solutions — or then you just look at the improvements, and we are all racing to the bottom, because there are less and less margins for everyone.

MJ: Could you tell me about what PwC Switzerland does with blockchain?

PW: We have a pretty broad service offering. We work with startups, we work with established companies. We offer — I wouldn’t say full loaded, yet, because there’s still, once again, a lack of clarity — but we do offer first inspections to ensure that things have been done correctly. And hopefully that will enable us to do audits, if the regulators allow us to do that by the end of the year.

We also work on the infrastructure level, we work with a lot of ICOs globally that want to come to Switzerland, from clients that are all around the world. I think we have a pretty broad offering: We offer legal tax services, insuring services, engineering services, some kind of review for code — I do not like the word audit there, because audit it makes that sound like it is bulletproof, which it isn’t. It’s just reviewed by another pair of eyes. And we are trying to grow our services.

MJ: I’ve heard that Switzerland has been increasing regulation for ICOs to make it harder to hold one in Switzerland. What do you think are the benefits that ICOs bring to the blockchain space?

PW: So, you are definitely right. Increasing, yes.

When it starts from nothing, it will increase.

I think there is very little regulation here in Switzerland, but there are guidelines that are good — I think they are not great yet, personally. I think there is a lot of confusion between utility tokens and payment tokens.

For me, the difference is that utility tokens with enough liquidity can became payment tokens. But there is clarity between asset-backed tokens and the other type of tokens, and I think there is going to be more and more ICOs that use the asset-backed classification.

I think that is excellent for industry — the blockchain industry — but also for the existing industry. It’s much more efficient to do an ICO with a security token instead of an IPO — or as a way to raise funding in a VC round or seed round. 

Unfortunately, there has been a lot of hype. The space is definitely not mature yet, and it needs a lot more cooperation between the various developers to establish standards in order to have new experimentations in the ICO space.

I think a lot of the fund distribution should not happen immediately after the ICO, but there should be some kind of the smart-contract thing or possibility to enable some kind of cliff for the delivery of the funds, based on accomplishments. Vitalik [Buterin] proposed the DAICO — I think that goes in the right direction — it’s definitely not perfect, but I think it’s in the right direction, for sure. I think there’s a lot more to do in the ICO space for it to be right.  

MJ: Could you expand more on how the DAICO works?

PW: The DAICO concept is — on a very, very basic level — enabling the token holders to vote on the release of funds in order to get back some control to the investors. And if they are not happy, they can vote against the release of funds and recover whatever Ether has been locked into the smart contract.

MJ: Zug recently held a trial municipal vote on the blockchain. Do you think that blockchain voting will become more widespread in the future?

PW: I think, conceptually, it is an interesting experiment. I am still not convinced that blockchains are the right platforms for voting. I think there is something really interesting about voting on blockchains, but I think the exciting parts are really the cryptography, the kind of pseudo-anonymity that you have.

But I think you need to be able to analyze your constituents’ votes. So I see voting on the blockchain more as a small-scale, board meeting kind of vote, rather than a national way of voting. I would expect more temper-proof, black boxes that record the votes, leveraging some kind of cryptography from all the participants and, at least, you can do a lot of querying on the data — because you want to know who’s happy, who’s unhappy and categorize your voters in order to better categorize how to respond.

MJ: As someone who has been in the space for almost 10 years, you mentioned that going from no regulation to some guidelines is already a step. How else have you seen regulation change in general?

PW: I may have a very biased version of things, because I was in San Francisco in the earlier days, but I feel like a lot of people have been waiting for New York to come out with some guidelines because they are such a big weight on the international markets. And I think it was Ben Lawsky who came out with BitLicense and things just trickled after that. There were jurisdictions that were more open about blockchain-based tokens, but they were kind of shy — I would say, not really very clear in public about their stance. So, I would say the BitLicense was probably the beginning of the dominos falling, or the beginning of the chain effect.

MJ: Do you think other countries are going to take the cue from the BitLicense?

PW: Well, I think countries that are afraid can always use BitLicense as a reference, and countries that are more embracing can do better. But I definitely think it can serve as a benchmark, unfortunately. New York has such a big weight in the financial industry globally that people have to take that into account what is the U.S. says.

MJ: What would be your example of the right kind of regulations for cryptocurrencies?

PW: The right kind of regulation? I think that it is early to say what’s right and what’s wrong. I think the right approach, rather than the right regulation, would be to embrace the community.

I really admire the Swiss regulators, which went on a road show — I had never seen that before. And I’d encourage many other regulators around the world to really go on a road show, talk to the community members, try to understand as much as possible, what is happening with not only tokens, but with the smart contracts — because most of the regulation right now is around tokens.

The real novelty, I think, is more the smart contracts, the immutability — tokens have existed forever: The gold-backed dollar was not gold, it was backed by gold. Shares are backed by the companies. So these are all some form of tokens, so tokens are not new. The novelty is that with blockchains: They’re easy to issue and they’re very divisible, very transparent and they have a lot of new properties.

So I would urge regulators to look a little bit more closely at the actual code, because we are building a jurisdiction where code is law, and these jurisdictions in cyberspace will live and will survive in any physical jurisdiction. And the regulators will have to regulate the interactions of those cyber-incorporated entities within their jurisdiction. And I think we are still very far from that mindset, when it comes to regulators — where we are just looking at what is in front of us —  i.e., the tokens.

MJ: A lot of people think that cryptocurrency mining has a negative environmental impact because of how much energy it uses. Does PwC Switzerland need to think about the energy aspect of promoting blockchain?

PW: At PwC, we are blockchain agnostic. A consensus mechanism is a consensus mechanism — and we don’t really care, we just care for it to be secure. And so I would agree that there is an impact on the environment, and that is an undeniable fact.

Now, I really don’t think it is a waste of energy. I think this energy is put to guarantee immutability. I’m eager to see better consensus mechanisms. The one thing I like with proof-of-work is it that it uses energy as a part of the consensus mechanism and, therefore, you can participate in the consensus mechanism wherever you are. It is independent of your stake, you can go to the North Pole and you have access to energy, and you can go to the Sahara Desert and you still have access to energy. I think that it is an interesting approach to keep it as decentralized as it can be.

MJ: Thank you!

PW: Thank you.

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Michigan Bill Would Make It Illegal to Counterfeit Blockchain Data

A pair of bills submitted to Michigan’s state legislature would make it a crime to illegally alter a blockchain record.

One of two bills presented earlier this month by state representative Curt WanderWall tweaks the state’s penal code pertaining to those who “makes, alters, forges or counterfeits a public record.” Under the proposed legislation, this would be extended to “a person that accomplishes a violation…by altering a record made utilizing distributed ledger technology.”

The legislation doesn’t offer any specific examples of what this means, nor is it clear what, exactly, spurred the creation of the bills.

Another piece of legislation offered up this month in Michigan applies similar changes for crimes involving credit cards. Like the previous bill, it extends an existing definition to cover the technology.

“‘Financial transaction device’ means any of the following…Any instrument…or other means of access to a credit account or deposit account including through the use of cryptocurrency or distributed ledger technology.”

If passed, the amendatory acts of House Bill 6257 and 6258, both introduced June 12, would take effect 90 days after being enacted into law.

Today, the state of Michigan has no specific regulations on cryptocurrencies.

However, guidance from the Michigan Department of Treasury back in a newsletter from November 2015 explains “purchases of virtual currency… are not subject to sales or use tax.”

In addition, Michigan State Attorney General, Bill Schuette, previously issued a consumer alert warning all residents that “virtual currency carries a significant amount of real-life risk.”

Police car image via Shutterstock. 

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.

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Code Is Law – But It's Not the Only Law for Blockchains

Primavera De Filippi is a permanent researcher at the CERSA/CNRS/Université Paris II, a faculty associate at the Berkman-Klein Center for Internet & Society at Harvard Law School, the “alchemist” for DAOstack and a co-author of “Blockchain and the Law.”

A blockchain network is a complex system that involves a variety of actors that cannot be trusted. Its protocol is designed to ensure that every actor has an incentive to cooperate and that the costs of defection are higher than the potential gains.

Yet, like other complex systems, blockchains are made of many different parts, interacting with one another in ways that are difficult to predict – and therefore difficult to govern or regulate.

It might be possible to regulate the actions of each individual part. But as the whole becomes greater than the sum of its parts, governance cannot be achieved without a proper understanding of the various components that constitute that whole, and the power dynamics that subsist among them.

This post provides an overview of the multiple layers of governance affecting blockchain-based systems. It distinguishes between two distinct governance structures: on-chain governance by the infrastructure and off-chain governance of the infrastructure – each model incorporating both endogenous and exogenous components, which contribute to varying degrees to the overall governance structure of a blockchain-based network.

Layers of governance

If we look the first post of this blockchain governance series, we see that most decentralized blockchain-based applications have their governance split into different layers, each one interacting with the other:

  1. The Internet protocols layer: e.g., the TCP/IP protocol
  2. The blockchain layer: e.g., the Ethereum protocol
  3. The decentralized app (DApp) framework: e.g., DAOstack
  4. The DApp layer: e.g., Sapien

Each layer implements its own governance structure, which may affect or be affected by that of the other layers. The design and implementation of these multiple layers involve several individuals, but chances are they come from different communities that may or may not communicate with one another.

Specifically, bottom-layer communities often implement their own governance structure with little to no regard for the governance system implemented on the upper layers. And yet in doing so they ultimately dictate how applications from the upper layers will operate.

For instance, DAOstack, a project I am involved in, is a DApp framework (Layer 3) built on top of the ethereum blockchain. It is therefore subject to the governance rules of that specific blockchain-based network.

Yet DAOstack also implements its own protocols that determine how people interact with the platform, and how they can create new decentralized organizations on top of it. An application (like Sapien) deployed on top of DAOstack will, in turn, have its own governance protocols specific to that DApp (Layer 4).

Accordingly, any blockchain-based application is subject first to its own governance rules, but is also indirectly affected by the rules of the platform on which it operates: the ethereum blockchain that ensures the proper execution of relevant smart contracts (Layer 2), and the internet network that makes everything run (Layer 1).

The governance of each layer can be distinguished into two separate components:

  • governance by the infrastructure
  • governance of the infrastructure.

These two mechanisms co-exist more or less peacefully and both contribute to regulating a particular platform or infrastructure according to their own – sometimes divergent or contradictory – set of rules

Depending on the focus of analysis, these two mechanisms can be regarded as either endogenous to a particular community or exogenous to that community.

Endogenous rules are elaborated by the community and for the community: they are a community’s attempt at self-governance through a set of self-imposed rules (e.g., the hipster’s dress code).

Exogenous rules are established and/or imposed by a third party that is external to the community, but nonetheless have the ability to influence it through a set of rules that community members are required to abide by (e.g., school uniforms).

Modes of governance

Governance by the infrastructure refers to hard-coded rules embedded into a technological platform. It generally focuses on the process of rule enforcement rather than rule-making (at least with regard to the elaboration of the initial set of rules).

In the case of ethereum, for example, endogenous rules refers to the blockchain protocol and consensus algorithm (Layer 2). From a DApp’s perspective, endogenous rules include decision-making procedures and technical rules embedded in the relevant smart contracts (Layers 3 and 4)–whereas the underlying ethereum protocol qualifies as exogenous. A variety of other exogenous rules also exist, like the TCP/IP and other Internet protocols that make it possible for people to find and connect to the blockchain-based network (Layer 1).

When these rules are endogenous to a blockchain-based network, we refer to governance by the infrastructure as “on-chain” governance. These rules are encoded directly into the blockchain-based network, which guarantees their execution in a secure and decentralized manner.

Sometimes, on-chain governance rules also specify procedures to amend themselves: just like we can make laws that stipulate how to make, amend or repeal laws, we can design protocol rules that define the procedures to make, amend or repeal other protocol rules.

Take Tezos, for instance: a self-amending blockchain, where people have the ability to change the protocol rules – including the rules to change the rules!

Governance of the infrastructure refers to all forces that subsist outside of a technological platform, but nonetheless influence its development and operations. These rules operate at the social or institutional level rather than at the technical level.

Endogenous rules comprise rules, social norms, customs, and other governance structures developed or endorsed by a particular community with a view to facilitating coordination within that community.

For instance, developers in open source communities codify rules and procedures to decide on developing and evolving an open source software project. Peer-review usually enforces these rules, although the community might also implement formalized mechanisms of enforcement and oversight. Failure to follow these rules might lead to exclusion from the community or other forms of social punishment.

In a blockchain-based network, we often refer to governance of the infrastructure as “off-chain” governance because the governance rules subsist and operate outside of the blockchain infrastructure. As opposed to on-chain governance rules, these rules are not automatically executed: they require a third-party authority for enforcement or oversight.

For most blockchain communities, endogenous rules include all rules and procedures used to decide which changes to implement in the protocol, including the decision to fork. In bitcoin, these are done via the Bitcoin Improvement Proposals (BIP) – an informal mechanism by which people can propose new features and improvements to the Bitcoin protocol.

Ethereum implemented a similar system for people to submit Ethereum Improvement Proposals (EIP), an informal procedure by which people can suggest or request changes to the ethereum protocol or code. However, none of these procedures are binding. The developer community evaluates these proposals and decides whether (and how) they should be implemented into the code base – along with the various problems that this might entail.

To the extent that these proposals get accepted and implemented into the code, governance of the infrastructure has the ability to affect governance by the infrastructure. In other words, because off-chain governance is generally geared toward changing the rules of the underlying blockchain protocol, it has the power to modify the structure of on-chain governance.

Exogenous rules neither stem from the community nor are chosen by it, yet they have the ability to influence the activities thereof.

For instance, although they do not apply directly to blockchain-based networks, national laws can impact the operations of such networks. Of course, because laws are inherently territorial, if violated, they can only be enforced by the national court system within the scope of a particular jurisdiction. Yet as soon as we start dealing with real-world assets (as opposed to pure digital assets), the rule of law will necessarily come into play, potentially countering the rule of code.

Perhaps the clearest illustration of the tension between endogenous and exogenous rules comes from the recent discovery of child pornography imagery and links encoded into the bitcoin blockchain. Hosting this type of content is illicit and national laws stipulate that such harmful content should be taken down.

Yet according to bitcoin’s endogenous rules, the blockchain is immutable: nodes cannot arbitrarily delete or modify the content that has been recorded onto the blockchain.

The same tension exists between blockchain’s immutability and Europe’s right to be forgotten, which entitles people to request the removal and deletion of specific information concerning them, if such information is deemed irrelevant, outdated, or otherwise inappropriate.

Governments or other regulatory authority impose these exogenous rules to ensure public order and morality. Their goal is to promote the interests of specific communities or the public at large – sometimes at the expense of the interests and norms of other communities.

Putting it all together

Today, most of the discussion about on-chain and off-chain governance is mainly looking at endogenous rules. Yet, it is the combination of endogenous and exogenous rules that ultimately dictates the manner in which blockchain-based platforms will operate.

Before we can begin to understand blockchain governance, we need to adopt an ecosystemic approach, looking at the various forces that might affect the operations of these platforms, and how they interrelate with one another.

As a result, we cannot focus only on endogenous rules and forget about exogenous rules. That would be like trying to understand people independent from their social context, analyzing a cell without looking at the body in which it lives, or disregarding the whole for its parts.

Law image via Shutterstock

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.