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Former S&P President Leads Seed Round for ICO Compliance Startup

Regtech and compliance startup iComply has just completed a seed funding round led by former Standard and Poor’s president Deven Sharma.

The firm – which seeks to develop standard compliance tools and services for other blockchain startups and in particular those which launch initial coin offerings or ICOs – announced Monday that it raised a seven-figure number during the round, although it did not provide an exact figure. DMG Blockchain and Block X Capital also participated in the round.

In its announcement, iComply also revealed that former CFTC official Jeff Bandman, former Nasdaq and Financial Industry Regulatory Authority (FINRA) executive Manny Alicandro, MIT fellow Praveen Mandal and attorney Thomas Linder have joined the startup as advisers.

In conversation with CoinDesk, Sharma said he chose to invest in iComply specifically because of the startup’s “focus on compliance and risk services for ICOs.” Compliance, he said, will help ease regulator concerns by providing transparency into ICO issuers.

Sharma also believes that the firm can aid adoption by supporting traditional financial services firms looking into the technology.

“My interest is to see iComply evolve into a benchmark that investors can use to assess credibility of issuers, sustainability of underlying services and the price of ICOs,” he said.

The startup’s founder and chief executive, Matthew Unger, said in a statement that new ICOs and exchanges will have to answer to regulators including FINRA, the Financial Transactions and Reports Analysis Centre of Canada and the Swiss Financial Market Supervisory Authority, among others.

As such, he said, “iComply’s patent-pending software enables both security and utility tokens to monitor and document compliance, governance and risk procedures, before a public blockchain executes an immutable trade, providing trust, integrity and transparency for our clients.”

Sharma explained that new tools like blockchain still need transparency to build investor confidence. Doing so, he said, “will allow for more growth of innovative ways of raising funds and investment – I see iComply as a critical component of making the entire ICO space more successful, because it provides the confidence.”

The concepts of transparency and trust, he said, were what sparked his interest in blockchain to begin with.

That said, Sharma said he has yet to invest in any token sales, telling CoinDesk:

‘There have been a few ICOs that had a fundamentally robust offering that I understood and did interest me [but I] missed the opportunity. Others that have transparency from a service like iComply, I would [invest in].”

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Coinbase Taps Regulation Veteran for First-Ever Crypto Compliance Chief

Cryptocurrency exchange Coinbase has announced the appointment of its first-ever chief compliance officer as it moves to become a licensed broker-dealer in the U.S.

According to a blog post published on Tuesday, the company is tapping the experience of Jeff Horowitz, who joins the firm following decades working for both banks and regulatory bodies.

Horowitz has spent the last 12 years leading the compliance team at Pershing, a BNY Mellon company and also one of the largest providers of brokerage custody. Before that, he worked at Citigroup and Goldman Sachs, as well as the Federal Deposit Insurance Corporation, a self-regulatory organization. All those roles saw Horowitz managing anti-money laundering and other compliance programs.

During his career, Horowitz has also taken efforts to shape financial regulation in the U.S via his involvement with industry associations such as the Financial Crimes Enforcement Network and the Financial Industry Regulatory Authority (FINRA).

Asiff Hirji, Coinbase’s president and chief operating officer, wrote in the blog post:

“His experience managing matters related to broker-dealer regulation, asset custodianship, and AML programs makes him a uniquely qualified leader for our compliance team.”

The appointment comes soon after Coinbase started offering a crypto custody service aimed at institutional investors and is taking steps to become a regulated broker-dealer in the U.S.

The company said earlier this month that FINRA had already approved its acquisition of three licensed broker-dealers, inching the firm a step closer to potentially listing crypto tokens deemed as securities.

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Bermuda's Blockchain Strategy Goes Beyond Just Winning New Business

When it comes to regulating the blockchain industry, size really does matter.

Government size, that is, according to the Bermudian officials driving the island’s regulatory efforts around the nascent technology.

“Small ships can turn quickly. That’s the beauty of Bermuda,” Premier David Burt told CoinDesk.

Bermuda is one of several small territories and microstates striving to leverage their nimble governments to attract blockchain and crypto businesses by creating regulatory certainty where other, larger governments have failed to deliver thus far. Liechtenstein, Malta, Gibraltar and, most recently, San Marino have joined the race alongside Bermuda, all offering proposals – and in some cases formal legislation – that promise “comprehensive blockchain legislation.”

Typically such schemes entail detailed guidance on how initial coin offering (ICO) tokens will be viewed; secondary market controls; investor and consumer protections; and anti-money laundering (AML), know your customer (KYC) and counter-terrorist financing (CTF) measures.

And to date, Bermuda’s strategy has proved fruitful.

Since launching a blockchain task force in conjunction with the Bermuda Business Development Agency (BDA) in late 2017, the government has passed legislation on ICOs and created a regulatory sandbox for those companies, put forth a Digital Asset Business Act and partnered with BitFury to shift the island’s property deeds system to the blockchain.

But most recently, and perhaps most notably, the U.K. territory inked a $15 million investment agreement with major crypto exchange Binance, demonstrating that the tiny island’s blockchain push is attracting real industry heavyweights.

This result is one reason, Burt argues, that Bermuda stands apart from its peers.

“We have a very simple mantra in my government, and it’s ‘show, don’t tell,'” Burt said.

But with the competition here fierce, Bermuda is attempting to diverge from other places luring crypto and blockchain startups by moving beyond regulation, and incorporating its blockchain aspirations into its own public policy agenda – including re-envisioning its youth education and immigration policies.

With this, Burt said:

“We believe over the last nine months that our government has shown that not only are we open for business, but we mean business.”

The old with the new

Understanding Bermuda’s blockchain strategy, and more importantly, what sets it apart also requires a historical view.

One feature which distinguishes the island from other aspiring hubs precedes the blockchain entirely – Bermuda’s multi-billion dollar insurance and reinsurance industries which have “full regulatory equivalence” with both the U.S. and the EU.

The maturity of these industries means that there are existing robust investor protection measures and other pertinent rules that regulators have been able to build on to create the Digital Asset Business Act, explained Sean Moran, head of business development at the BDA.

“We’ve had to tweak them, of course, to make them appropriate and fit for purpose for this industry,” Moran told CoinDesk, “but we have a model that we can work from that takes all of those protections and disclosures into account, and that’s what we’re working from.”

The dominance of Bermuda’s reinsurance and insurance industries has also resulted in a burgeoning compliance-oriented sector, which Burt envisions as a critical resource for the blockchain businesses he hopes to attract.

“If you cannot meet, match the Bermuda standards, if you cannot pass our high bar, then we don’t want you,” Burt said.

He explained that part of creating desirable regulatory conditions is implementing high compliance standards for companies that are made in consultation with industry players – like Binance, for example.

“That is squarely in our sweet spot,” Wayne Caines, Bermuda’s minister of national security, told CoinDesk.

More than a haiku

And that sweet spot will be especially beneficial for ICO issuers and the various stakeholders of that burgeoning industry. While industry has been waiting with baited breath for the U.S. Securities and Exchange Commission (SEC) to come out with formal guidance – since it was revealed that the regulator was closely investigating ICOs – Bermuda regulators have already set up a framework for those companies.

The territory will not only require ICO issuers to scrutinize potential investors, but Bermuda itself will also scrutinize the issuers by requiring them to outline beneficial ownership structures and to create more robust white papers.

According to John Narraway, an emerging technologies consultant at the BDA, this is particularly helpful since:

“The regulations around what must be in an offering document or a white paper is critical because a white paper can be something like poetry or a haiku.”

He thinks this collection of standards will greatly mitigate the potential for Bermudian blockchain companies to engage in fraudulent activities.

And these regulations were also based off an existing regulation, the Companies Act, that officials merely tweaked.

“We’ve kind of billed this as, if you will, the greenhouse off the side to start growing new things, but using the main house of structure and reputation with the success of the thing and the clarity that’s going to come from that,” John Narraway, emerging technologies consultant at the BDA said of the amendment.

Yet, those leading Bermuda’s blockchain efforts are also cognizant of the industry’s proclivity for rapid change, and believe their regulations are prepared to accommodate it.

“Think of it like software versioning,” Narraway suggested. “We know it’s not going to be 100 percent perfect, but it’s going to be as best as it possibly can be. If we can go from whiteboard to legislation in two months, how long is it going to take us to issue a ‘patch’ – to use software terminology?”

He added:

“We’re going to have [version] 1.1 probably pretty quickly because we’re going to be listening to the industry.”

Involving the locals

Likewise, another means by which the government plans to keep pace with the industry is by keeping communication lines open with the major industry players, and making sure to keep the island’s citizens in mind.

For instance, the memorandum of understanding between Bermuda and Binance stipulates that the crypto exchange will not only move its compliance center to the island, but also invest $10 million into blockchain-related educational programs and $5 million in blockchain startups over the course of two to three years.

In return, Bermuda will work to provide a steady talent pool for the company.

“We want to do it because we want those players and others to come into the market and create economic activity,” Burt said of the deal.

Echoing Burt, Narraway said, the arrival of such companies can bring Bermuda up to speed with the industry by converting and capitalizing on local talent, and ideally abet the island’s “brain drain,” whereby highly-skilled locals move to other places where the market for such talent is more competitive.

“We want to be able to pull [young people] back in and give them opportunities, real opportunities, to participate in the economy and to grow it and to develop their careers,” Narraway said.

According to Burt, the Bermudian government is in talks with other heavyweights from “the entire space,” though he declined to identify them. The officials plan to release further information on industry partners and legislation in upcoming weeks.

Narraway thinks local startups also stand to benefit, particularly because the industry presents new possibilities for raising early stage capital, which is in short supply on the island.

“I can tell you from the business development side, we’re having meetings every week with companies that are saying, ‘I think I’m going to do this startup, this is where I want to go,’ and now they’re saying, ‘explain to me this ICO as an option for doing my first round of funding,” he said.

Narraway concluded:

“So I think this is a huge opportunity for the local companies and local entrepreneurs in Bermuda.”

Minister Wayne Caines, John Narraway, Premier David Burt and Sean Moran image by Annaliese Milano for CoinDesk

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A16z, Founders Fund Back $28 Million Raise for Tokenized Securities Startup

Tokenized securities startup Harbor has secured $28 million in funding from major Silicon Valley venture capital firms, the company announced on Tuesday.

The strategic round was led by Founders Fund, and included the participation of Andreessen Horowitz and Pantera Capital. Existing Harbor investors Craft Ventures, Vy Capital and Valor Equity Partners, as well as Future Perfect Ventures, 1confirmation, Abstract Holdings and Signia Venture Partners also took part in the round.

Harbor’s president and general counsel, Joshua Stein, told CoinDesk that the company will use the funding to further develop its ethereum-based R-Token platform, which he said provides for “compliance at the token level.”

In practice, this means that the protocol tokenizes real-world assets and uses ethereum smart contracts to ensure that investors can execute trades only if they satisfy pertinent regulations, such as know your customer (KYC) and anti-money laundering (AML) requirements.

The company also intends to direct funds toward the expansion of its team.

“We’ve had so much inbound interest from folks from different asset classes seeking to tokenize what they’re doing,” Stein said in an interview. “Now we need to build out the team and the platform and the protocol to be able to handle that inbound interest.”

Stein suggested that Harbor was able to attract prominent investors in part because the company has gained significant traction since its inception.

He told CoinDesk:

“There’s literally tens of trillions of dollars of real-world assets that would benefit from the ownership interest being tokenized, and that can unlock tremendous economic value.”

Pantera Capital’s Joey Krug echoed this point in statements.

“With Harbor, we could see things like funds tokenizing LP interest for illiquid asset classes, marrying the liquidity of markets with the illiquidity of the underlying assets owned by the fund. The infrastructure Harbor is building will unlock a range of new possibilities for capital markets,” he said.

Stein said Harbor’s efforts to create liquidity will benefit the larger blockchain ecosystem, and that he’s excited about the services and dapps emerging from the ethereum community.

“By driving a whole bunch of economic value around the public blockchain ecosystem, we help drive all those different companies, providers and developers,” he explained.

Harbor intends to roll out its platform for securities issuers and licensed broker-dealers this summer.

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Chainalysis Raises $16 Million for Real-Time Crypto Compliance

Blockchain startup Chainalysis has today announced a new real-time cryptocurrency compliance tool and a $16 million Series A investment from Benchmark Capital.

Founded in 2014, Chainalysis provides cryptocurrency exchanges, international law enforcement agencies, and other clients with bitcoin transaction analysis software to help them comply with regulations, assess risk and identify illicit activity. Notably, the company helped investigate the Mt. Gox bankruptcy case.

“What we decided when we founded Chainalysis was that we need to solve how we can make the new world of finance work together with the old world of finance. Basically, how can we bridge the gap between banks and bitcoins?” Co-founder Michael Gronager, previously the chief operating officer of Kraken, told CoinDesk in an interview. 

More specifically, co-founder Jonathan Levin explained, that the firm builds a data set that links “real-world activity to cryptocurrency transactions so that we can uncover the underlying real-world purpose of the transaction.”

Until now, Chainalysis’ software has only allowed customers to analyze transactions retroactively. Its new tool, dubbed Chainalysis KYT (for “know your transaction”), provides transaction analysis in real time.

This gives exchanges, for example, the capacity to instantly know if they are dealing with a trusted financial institution or with suspicious entities, Levin said. Exchanges can then use this knowledge to inform how they treat deposits and withdrawals on their platform, he added.

Levin claimed that the rapid expansion of the cryptocurrency industry has made this software a necessity:

“When we started the business, exchanges were much smaller. They could use manual reviews and have the types of rules in place that allowed them to be compliant. Today, they’re onboarding the same amount of customers on a weekly or monthly basis. So now there are millions of customers who need automation tools to trigger reviews and to do investigations, and you need to have these investigations not take half an hour to 45 minutes. It needs to be right up front.”

The company has trialed the product with several existing unnamed customers, Levin said, adding that they’ve seen a “20-times improvement” in the speed of investigations.

And there’s more

Chainalysis’ software previously only supported the bitcoin blockchain, but the company announced on Thursday that it is rolling out bitcoin cash-compatible tools for its law enforcement and government clients. Furthermore, Gronager and Levin said the company will aim to support 10 cryptocurrencies by the end of 2018.

To fund this expansion, the company will tap some of the $16 million garnered from its funding round with Benchmark Capital. However, the funding isn’t the only thing Chainalysis has acquired from Benchmark, which has been investing in the industry since 2014.

The company also snagged Sarah Tavel, a general partner at the firm who was previously a product manager at Pinterest, for its board.

“Chainalysis is really an enabling technology that you need to participate in this ecosystem,” Tavel told CoinDesk.

The company’s appeal, she said, comes from its founders’ early recognition of the need to address compliance obstacles in order for the ecosystem to grow.

In her new capacity as a board member, Tavel said she hopes to use her experience at Pinterest to help the company scale.

“I think a lot of what I bring to the table is just the experience of having scaled through hyper growth and helping them, as much as possible, look around corners,” she explained.

Levin and Gronager don’t expect Chainalysis’ rapid growth period to stop anytime soon – but just not because governments and law enforcement agencies are becoming increasingly interested in the industry.

“We’ve seen just massive interest from the cryptocurrency market,” Levin said, adding:

“Actually, despite market conditions, that part of our business is growing stronger than anything else. It’s been exploding. We’ve got triple the number of customers in that segment than we had last year, and that growth is actually just accelerating.”

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Compliant ICOs? Bitcoin OGs Launch Regulated Token Sale Service

Mason Borda has been into initial coin offerings (ICOs) since the beginning.

Yet, the former BitGo software engineer, who helped set up Augur’s wallet for its token sale in 2015, was hesitant to enter the market himself until last summer. That’s when Borda, and security veteran James Poole, started building TokenSoft, a platform for helping projects manage their initial coin offerings (ICOs).

Revealed exclusively to CoinDesk, the project is officially launching today, and with the news, Borda is detailing for the first time a number of the platform’s features that are aimed to combat what he sees as prevailing industry issues and pain points.

For one, the white-label software solution is all about compliance, treating every token sold as a security per guidelines laid out by various SEC regulations (such as Reg D, Reg A, etc.).

This will likely attract many clients amid rumors the SEC has undertaken a sweep of the ICO industry, sending out subpoenas and requests for information to all kinds of stakeholders.

“People are starting to err on the side of compliance, rather than trying to figure out how to make their token sale a utility token sale,” Borda said. “We’ve always known here, at least, that you can’t really do a full utility token sale.”

And while TokenSoft is entering a hot market with a fair share of competition, Borda believes his past while help him differentiate the platform and make sure it’s prepared for anything the token industry throws at it.

He told CoinDesk:

“Regulations are really important to me and if you see what happened with the previous blockchain companies, the ones that survived are the ones that embraced regulations.”

Automating compliance

With the focus on compliance, Borda told CoinDesk the platform can handle just about any token offering, including those that want to target U.S. customers – they just have to follow the rules.

The U.S. regulatory environment is notoriously cumbersome, and with the SEC yet to issue any formal guidance on the industry, some token issuers have decided to cut off investors in the country rather than deal with any possible regulatory repercussions.

TokenSoft, though, is for issuers that don’t want to circumvent rules and regulations, but be proactive about building their tokens with existing regulations as guidelines.

And that’s not just in the U.S., but throughout the world, where quirky legalities also exist.

For instance, Borda mentioned fund-of-funds client Apex Token Fund, which had a requirement that their investors needed to adhere to the disparate securities laws of the countries they were in. As such, TokenSoft built their platform to take that into account, automating the addition of compliance mechanisms, such as know your customer (KYC) and anti-money laundering (AML), that vary by country.

“If in other countries there are different requirements, we can help do that,” Borda said, although he didn’t disclose how exactly TokenSoft does this.

It’s currently serving 50 countries for Apex Token Fund.

Looking forward, the company sees opportunities in further automation.

“There’s a lot of new technology that allows the enforcement of these rules we keep talking about, but by pushing that down to the blockchain itself,” said Poole, an alum of prominent security companies like RSA and Symantec.

For example, say a security token needs to be traded only with other regulated investors, a smart contract could white list all the wallets that could possibly trade that token and block trades that sent tokens anywhere else.

Borda said this could create a global mesh of compliant channels, which could increase liquidity for these assets while eliminating the friction of abiding by the law.

Engineering good experience

But there’s more than just compliance.

Another area TokenSoft looks to improve is the user experience for investors. Poole believes TokenSoft’s white-label software, in which all the issuer’s branding and precise legal language can be easily adapted, will help there.

“All the investors know that they go directly to our client to be the face of the sale,” Poole said.

But because TokenSoft handles the infrastructure that supports that page, the instances of those websites crashing due to significant traffic is limited. The benefits of this were displayed when Overstock’s tZero switched platform providers in the midst of their $250 million token sale, dropping SaftLaunch because of its time-consuming and complicated compliance.

TokenSoft has also added mechanisms for making purchasing cleaner.

For instance, when a typical sale goes live that accepts ether, bitcoin or another cryptocurrency, the same public address is usually given to all investors, leading to higher transaction fees.

But Borda believes that’s a waste of money. So, on the TokenSoft platform, investors are queued up using a unique ID as they come into the sale. In this way, their place in line is already set, eliminating this practice.

Shifting perspective

Still, given the somewhat murky nature of ICO regulations, it’s natural to ask, what exactly convinced Borda and his team the timing was right?

First, Borda said he began seeing entrepreneurs who already had successful companies move to launch token sales, putting their reputations on the line. And second, Borda saw a spate of high-profile law firms starting to take on ICO clients.

TokenSoft only works with companies with counsel from one of four law firms, for now: Perkins Coie, Cooley, DLA Piper and WSGR.

And for Poole? Seeing crypto tokens start to find uses beyond just raising money, such as decentralized governance, was the turning point for him.

“This actually is something that could change a lot of the finance industry,” he said.

TokenSoft’s first two sales – and Swarm Fund – ran on Sep. 9. Since then, the company has worked with six more clients and currently has five sales active.

“There’s a lot of new companies entering the space that haven’t necessarily been in production,” Borda said, adding:

“We’ve been in the space for a while. We’re doing interesting things like helping people adhere to global securities regulations.”

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in BitGo.

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AML vs. Privacy: Crypto's Compliance Conundrum

Marc Hochstein is the managing editor of CoinDesk and a former editor in chief of American Banker.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.

Each of these three stories out of Southeast Asia is significant on its own, but when you read them side by side they tell a much bigger, global story.

First, on Jan. 23 South Korea’s financial regulator set a date for the introduction of a new rule barring anonymous cryptocurrency trading accounts. (Or, as some sensitive snowflakes out there prefer we’d put it, “requiring customer identification for crypto trading accounts” – we never imagined anyone in this space would want to sugarcoat unwelcome news with euphemisms, yet here we are. But I digress…)

The very next day, a different South Korean agency fined several cryptocurrency exchanges for failing to secure customer data. “While the security threats such as virtual currency speculation and hacking of handling sites are increasing, the actual situation of personal information protection of major virtual currency exchanges is very weak,” warned the chairman of the Korea Communications Commission in announcing the fines.

Topping it all off, on Jan. 26, Coincheck, a crypto exchange in Japan, admitted it had been hacked in what appears to be the largest single theft in cryptocurrency history. Some $533 million worth of a mid-tier crypto known as XEM were pilfered.

So let’s step back here. Taken together, these events remind us that:

1. Concerned about money laundering and financial crime, international regulators want to make sure crypto exchanges, like most financial intermediaries, know who their customers are. Depending on how much crypto a user trades, this entails the exchanges collecting all sorts of personally identifiable information: real name, address, a copy of your passport, even a selfie.

2. The exchanges aren’t very good at securing this data. Which isn’t a surprise, because…

3. They aren’t very good at securing users’ funds, either.

Experienced crypto users will tell you that the answer to No. 3 is to keep most of your coins in cold storage and use the exchanges only for assets you’re actively trading. But the first two observations present a much knottier problem.

In short, the juxtaposition lays bare the fundamental tension between compliance with anti-money-laundering and know-your-customer laws, on the one hand, and data privacy on the other.

No easy fix

There are a number of ways to potentially resolve this conflict:

Revisit AML laws. Ha. Fat chance.

Not that these don’t deserve greater scrutiny. Libertarian early adopters of bitcoin may overstate their case (and invite ridicule from smug, soy-eating bluechecks) when they declare “money laundering is not a crime.” A better way to put it is this: It stands to reason that covering up a crime is itself a crime, but should it be a crime to obscure activity that is not itself illegal or harmful, simply because doing so inconveniences law enforcement?

Some would say the answer is yes. There is a lot of nasty activity going on out there, even if you exclude victimless crimes (those involving only consenting adults). But the question needs to be asked of policymakers more than it has been. Still, don’t hold your breath for much in the way of change in a political climate shaped by 9/11, Charlie Hebdo, San Bernardino, etc.

Exempt crypto businesses from AML laws. LOL, JK. See above.

Require exchanges to tighten up cybersecurity. Say what you will about Benjamin Lawsky, but the former New York State regulator and architect of the BitLicense recognized the importance of diligent security practices for digital asset custodians. In fact, the strict cybersecurity standards he wrote for cryptocurrency firms in that controversial regulation were later imposed on traditional financial institutions on the NYS Department of Financial Services’ watch (over their objections).

Granted, the BitLicense hasn’t exactly been a roaring success, with a grand total of four licenses granted since the regulation took effect in 2015 (unless you count the two trust charters given to applicants). Most startups in the crypto space have simply avoided doing business with Empire State residents or performed contortions to get around the regulations, viewed as onerous for a number of reasons. But the cybersecurity requirements aren’t usually cited among them.

More to the point, though, this approach still amounts to saying “thou shalt collect and store nuclear waste – oh, and you better secure it, too.” More creative solutions might be in order.

Thread the needle. In other words, find a way to satisfy the objective of fighting crime without making businesses hold all this data in the first place.

For example, there is an adjacent ecosystem of digital identity startups and open-source projects aiming to create personal data vaults and reusable IDs. Although models vary, a common thread is that instead of giving the keys to your identity to every stranger you do business with, you could just present them with proof that you are entitled to access a given resource.

For example, a bouncer at a club needs to know you’re old enough to drink, but not your exact birthday; similarly, if you can prove to a bitcoin exchange that you’re not on the U.S. Treasury Department Office of Foreign Assets Control’s sanctions list, maybe they wouldn’t need that copy of your passport.

The big idea is that not everyone you trade with needs to know who you are as long as someone knows who you are. Law enforcement could still trace transactions through the blockchain, to an exchange, and ultimately to an identity provider that could identify the user under court order.

Generally this concept, articulated in the 2014 Windhover Principles and elsewhere, sounds like an improvement on the status quo. But real-world applications have been rare.

Also, you could argue that even if put into wider practice, these ID solutions might amount to a mere rearrangement of deck chairs, at best. If we no longer have lots of nuclear waste facilities, but instead have a few big nuclear waste facilities (with back doors for law enforcement to boot), won’t that make identity thieves’ job even easier?

And finally, even if these ID providers are secure, who’s to say they’d insist on seeing a warrant before giving up your data to the government? The Snowden revelations showed how the odious “third-party doctrine,” which states that citizens have no reasonable expectation of privacy when they give information to a business, has undermined Fourth Amendment protections in the U.S. It’s hard to trust governments to respect constitutional limits on their power in this day and age, and Donald Trump occupying the Oval Office is really the least of it.

One sincerely hopes that the development of decentralized exchange will eventually make the issue moot, at least as it relates to trading of digital assets. Until then, stay vigilant about protecting your money, your personal information, and your civil liberties.

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Cambridge Blockchain, IHS Markit Ink KYC Partnership

A new partnership has been inked between identity startup Cambridge Blockchain and IHS Markit, the U.K.-based data analysis firm.

The deal will see Cambridge Blockchain complement IHS Markit’s existing services around anti-money laundering and know-your-customer, CEO Matt Commons said in a statement published today. The technology developed by the Massachusetts-based’s startup will be bridged with IHS Markit’s platform.

The two firms will effectively apply distributed system concepts to the compliance issues tied to know-your-customer information (KYC), which banks must collect in accordance with money-laundering regulation, with the idea that clients have greater control over that data.

“We look forward to continuing our collaborating with IHS Markit to give financial institutions confidence that their KYC, AML, tax, legal, MiFID, EMIR and other regulatory information is complete, accurate and up-to-date,” Commons said.

IHS Markit has played a role in the development of applications of the technology in the past, notably taking part in trials conducted by derivatives clearing giant DTCC, among other tests.

The announcement also comes just under a year after Cambridge Blockchain completed a $2 million funding round, with backing coming from venture capital firms Partech Ventures and Digital Currency Group.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Cambridge Blockchain.

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Contortions for Compliance: Life Under New York's BitLicense

Sarah H. Brennan, a corporate and securities attorney, leads the blockchain technology, cryptocurrency and digital assets practice team at Lippes Mathias Wexler Friedman LLP.

In June 2015, in a race to be a first mover in the space, the New York Department of Financial Services (DFS) enacted the BitLicense regulatory framework, a licensing regime that covers substantially all “virtual currency business activity” to the extent it touches New York or its residents.

Namely, any business engaging in virtual currency business activity involving New York State or persons that reside, are located, have a place of business, or are conducting business in New York must apply for the BitLicense, with no grace periods or de minimis exceptions.

To the extent a business makes it through the licensing process and receives a BitLicense, as a whopping four businesses have to date (in addition to two companies who undertook the application process and received trust charters), the BitLicense imposes significant operational burdens, requiring robust compliance policies and processes with respect to anti-fraud, anti-money-laundering, cybersecurity, privacy and information security, among other requirements.

As such, the BitLicense has prompted flight from New York by larger players such as Bitfinex and Shapeshift and has had a chilling effect on others acting in an abundance of caution.

For those of us who remain in New York because we happen to live here, there is a widespread sense of confusion as to the scope of activities which fall under the purview of the regulations given: their vague wording, requirements that seem positioned toward financial institutions and the lack of formal guidance in the wake of the enactment of the regulations.

In all, uncertainty as to the reach of the licensing requirement has left many companies with three options: avoid doing business in New York entirely, attempt to structure a business around the law, or engage in potential or outright non-compliance with the law.

Based on the fact that DFS has received so few applicants to date, and has only five rejected applications on file, one could infer that many are electing non-compliance.

Case studies

Drone Energy and Travel by Token are two Empire State-based clients of mine running very different businesses, but with the common concern of operating in line with best practices.

These businesses, in addition to complying with applicable foreign, federal and state regulatory regimes (existing and as they develop), are expending a significant amount of time and energy to structure around the BitLicense.

For example, Drone Energy has a patented solution and an innovative business model designed around mining cryptocurrency. While it would be helpful for this exemption to have been explicit in the text of the BitLicense regulations, DFS has indicated in public comments that mining activities are categorically outside the scope of the law.

However, the business will at some point look to exit to U.S. dollars without tripping into the definition of “virtual currency business activities.” This has been limiting as we have discussed various potential business models but something our client is able and willing to work around.

The other client, Travel by Token (TBT), is an early-stage start-up that uses an AirBnB/timeshare hybrid model for vacation stays, providing token holders access to vacation properties purchased and held by the company for the exclusive use of token holders at below-market prices.

As the token is in the development stage, we are in the clear to develop the underlying software in New York State under the BitLicense regulations. But the company will need to leave the state before commencing a token offering and hazarding being deemed to be “controlling, administering, [and/]or issuing a Virtual Currency” under Section 200.2(q)(5) of the BitLicense regulations.

While providing a viable path forward, structuring business plans and transactions to avoid the BitLicense is not a small or inexpensive undertaking.

For an example of how regulations interact, given the developments in securities laws over the course of December alone, in order to conduct a utility token offering (whether for Travel by Token or for another New York State-based client) we are considering the following as a potential workaround to the BitLicense as it interacts with applicable securities laws:

  • Structuring an initial offering as a 506(c)-compliant Simple Agreement for Future Tokens (SAFT) offering, using a third-party service provider to verify accredited investors and for AML/KYC compliance, to the extent we do initial raises in New York because the SAFT, while squarely an investment contract subject to securities laws, should not trip the BitLicense as no tokens are issued;
  • Use funds raised in SAFT offering to continue to develop the token and move the business out-of-state and/or build out the organizational structure and form an affiliate to conduct the offering in a friendlier jurisdiction;
  • Subsequent to reorganizing the business, in the next iteration of funding, through a token offering:
    • At the time of the token offering, we would evaluate the state of securities laws with respect to whether utility tokens that are immediately usable in exchange for a service or product constitute securities in the eyes of the Securities and Exchange Commission and/or state regulators. This would inform us as to whether there is a need to comply with securities laws in the larger offering. However, even if we take the position that a token is not a security based on the Howey test, we would likely expend the effort to produce offering materials with robust securities law type disclosures;
    • We would, absent DFS guidance, plan to block New York State residents (and any others in jurisdictions that give rise to compliance concerns) from participating because, taking a conservative approach, all issuers will likely need a BitLicense to conduct any sort of token offering if based in the state or offering to state residents.

The above process only relates to fundraising and is based on the current state of the law as we understand it (literally) today.

New York passed the BitLicense regulations in a regulatory vacuum and now state and federal laws are catching up to it, oftentimes with less-than-stellar coordination between regulators, causing a compliance nightmare.

Next steps

Absent a successful challenge to the BitLicense regulations in court, and short of the DFS (or the state legislature) reworking the rules in line with the Uniform Law Commission framework, it would be helpful for the DFS to issue more expansive guidance than the bare-bones FAQs posted on its website.

We will also learn the limits of the law the hard way – through enforcement actions, though there have been none to date.

However, further clarification (in whatever form it takes) should provide comfort in the space and limit further exits as well as complex structuring exercises.

Contortion image via Shutterstock

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Libra Eyes Institutional Investors with Crypto Tax and Accounting App

Blockchain startup Libra has today unveiled a new compliance application for the institutional market, targeting businesses like crypto funds, market makers and exchanges.

Called Libra Crypto Office, the app is being pitched as a way to both connect to the broader ecosystem of cryptocurrency services and automate the real-time gathering of critical information for compliance purposes.

According to Libra CEO Jake Benson, the product came about after discussions with people working in the tax, compliance, and risk assessment fields. Amongst the issues raised, he said, were concerns over scaling due to increasingly complicated processes.

“Further, we found without the right systems and processes, institutional investors were unwilling to allocate significant investment into the industry,” he continued. “With the introduction of Libra Crypto Office, we hope to continue industry efforts to upgrade information accuracy, transparency, and compliance practices.”

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