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Regulation, Taxation Loom Over Crypto Investors

The legacy of the W.J. Howey Company lives on, though not in a way the owners of the Florida citrus grove would have likely envisioned.

Seven decades after its legal battles with the SEC, the company has been enshrined with near legendary status in the cryptocurrency space, as the investment contract test every initial coin offering token is being judged by.

“Many of us lawyers studied this Howey case when we were in law school, and we couldn’t have, in our wildest dreams, imagined going into a room like this where it could be recited like it’s the Pledge of Allegiance,” joked Lewis Cohen, a partner with Hogan Lovells, during a legal panel Tuesday at Consensus: Invest in New York.

As the world of cryptocurrencies and ICOs continues to race ahead, the lingering questions the test elicits in the ICO community about how these tokens will fit within existing legal and regulatory frameworks remains the elephant in the room.

Perhaps the most pressing question is whether there is a distinction to be made between tokens that function as securities and those that have a broader utility for a future platform.

In that regard, the Simple Agreement for Future Tokens (SAFT) framework, which sought to advance the dialogue of what a two-tiered token sale that separates the primary and secondary markets might look like, has received a good deal of optimism.

But yesterday at the conference, multiple speakers poured cold water on the concept and suggested a return to the drawing board.

Matthew Roszak, co-founder and chairman of blockchain startup Bloq, said:

“I’m not a huge fan of [SAFT]. I think trying to hermetically seal that pre-ICO financing is not as democratized and open as you’d like it to be.”

‘Too many hands’

But regulatory uncertainties in the space extend well beyond the SEC.

Numerous agencies at the federal level are still determining their approaches toward these new assets, and with additional state authorities likely to get in on the action, jurisdictional complications could make the space even more confusing, argued Gary DeWaal, special counsel with Katten Muchin Rosenman LP.

DeWaal explained:

“Too many hands in the pot are never a good thing for the development of an asset class.”

Especially since many regulators are under inaccurate impressions about tokenized assets, according to Lee Schneider, a partner at Will McDermott & Emery.

He noted that many are making the mistake of juxtaposing the existence of liquidity with whether or not the underlying asset meets the definition of a commodity or a security.

“The nature of the token is hugely important here. You can’t divorce the regulation of the thing from what it is just because you’ve digitized it,” he said, adding that he’s been pushing back against these misperceptions.

Taxation is … coming

Another legal gray area within the cryptocurrency space relates to taxation, and with the price of bitcoin eclipsing $10,000 per coin Tuesday, the IRS will be paying greater attention in the coming year.

“If you hold large positions and you’ve been moving in and out of a lot of these tokens and coins, the IRS is probably going to start digging into this stuff,” said Kelsey Lemaster, a partner specializing in taxation at Goodwin Procter.

And the advent of ICOs only complicates matters further, as the IRS has not issued guidance there, but according to Lemaster, investing in an ICO token is most likely a taxable event.

“I’m sure it’s not reported in 99 percent of transactions, but I’m sure that’s what the IRS would say,” he contends.

But the taxation issue could become more manageable as a slew of cryptocurrency-focused tax software products, including a new app rolled out by Libra, are beginning to hit the market.

Such products, which look to bring automated tools to traders instead of them having to manually input data into Excel spreadsheets, better enable traders acting in good faith to comply with IRS requirements, and could springboard cryptocurrency activity.

On why tax tools are so important, Jeremy Drane, chief commercial officer at Libra, said:

“At some point in time, you reach a level of complexity in your operations where you can’t scale.”

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

Libra executives image via Aaron Stanley

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Interested in offering your expertise or insights to our reporting? Contact us at news@coindesk.com.

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ICO Pros Call for Self-Regulation Citing SEC Risk

The initial coin offering (ICO) community needs to embrace self-regulation now to lessen the blows likely to come from enforcement and regulatory actions, according to speakers at CoinDesk’s Consensus: Invest yesterday.

A crackdown in the U.S. is inevitable, perhaps as soon as six to 12 months from now, warned Charles Hoskinson, CEO at Input Output and former CEO of the ethereum project.

This will likely occur once unsophisticated retail investors start to lose money in the space and run to the Securities and Exchange Commission (SEC) in search of recourse, he said during a panel discussion at the Tuesday conference in New York.

“I do believe there’s going to be some form of enforcement because, basically, what you have now is people offering [cookie-cutter ICO] services. It’s all just semantics and structuring and so forth,” Hoskinson said, adding that, while some projects may withstand scrutiny, many will not.

“When you see these types of structures, maybe some of them are legitimate, but 80 or 90 percent will end up just being ‘me too,'” said Hoskinson.

Shining light?

Given that landscape, Matthew Roszak, co-founder and chairman of Bloq, argued that the ICO community in the U.S. needs to do a better job of self-regulating and self-policing, so that when regulation does come, its effects will be blunted.

Roszak explained:

“There is a lot of froth and crappy ICOs out there. We as a community need to put our best foot forward to say ‘Let’s start thinking about frameworks for best practices and self-regulate ourselves.'”

Another panelist, Olga Feldmeier, chief operating officer of Smart Valor, a blockchain finance startup based in Zug, Switzerland, offered the country’s ICO community as an example of what has been, to date, a successful embrace of effective self-regulation through the use of guiding principles such as transparency in vesting.

However, Feldmeier added that the example of Switzerland might not be easily extrapolated to the U.S. because it is a such a small jurisdiction that has a longstanding tradition of self-governance in financial services.

Roszak, who is a founding member of the Token Alliance – a Chamber of Digital Commerce initiative that aims to develop best practices – added that taking steps now to ensure transparency and auditability, such as lockups during token sales and sound treasury management, will mitigate headaches down the road.

“When [regulators] show up, the pendulum swing is usually overdone,” Rozak said. “But if we as a community say ‘Let’s self-regulate,’ all these things will delay some of that regulatory friction that’s going to be upon us.”

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

Event image via Aaron Stanley for CoinDesk

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

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Tokenized Fund-of-Funds to Raise $100 Million Via ICO

A new fund-of-funds announced this week is aiming to raise up to $100 million via an initial coin offering (ICO).

Called the Apex Token Fund, the key idea is that tokenization gives buyers a way to cash out their investment early on, without diminishing the underlying principle.

Speaking exclusively to CoinDesk in a telephone call, Joseph Bradley, a fund co-founder, said:

“The whole idea of applying a blockchain to this type of structure is it unlocks liquidity between the vintage and harvest date of raising the fund.”

Under the scheme, each token will represent a proportional piece of equity in the fund. Once the tokens are distributed to investors, they can start trading those tokens on exchanges. If one of the underlying funds spikes or drops in value and an investor wants to exit their position, they can do so without the need to follow the lockup rules typical at traditional hedge funds.

The fund tentatively plans to run a presale of the token – also called Apex – sometime in January, with a public sale in February. The fund will launch if a minimum of $25 million is raised, and has a hard cap of $100 million.

Apex Token Fund representatives declined to disclose which funds it has secured access to so far.

‘Democratization of access’

Domiciled in the British Virgin Isles, U.S. investors will be excluded from holding Apex. There are more than 120 crypto hedge funds out there at this point, according to CNBC, including several funds-of-funds.

In fact, Bradley and Chris Keshian (another co-founder) also built Neural Capital, another crypto fund that launched in December 2016. They set up the new fund after realizing that many mainstream crypto investors have been excluded from the best performing hedge funds, limiting access to high-net-worth individuals.

Keshian said:

“The idea behind this democratization of access is to allow your average crypto holders to gain exposure to these fund returns through these tokenized methods … We also saw this space where a lot of people are investing in ICOs. They aren’t necessarily investing because they believe in the technology. They are investing for these non-linear returns.”

While the returns can be large, crypto investors know the price volatility can be stomach-turning.

“You can smooth out volatility by having a diversified investment approach in different investment strategies,” Keshian said.

To this end, Apex will provide a balance of funds focused on price arbitrage, protocol focus, sentiment analysis and other strategies. 

Finite lifespan

The first Apex Token Fund will eventually sunset, divesting from all of the underlying funds, at which point token holders will then be able to redeem their tokens for a proportional quantity of fiat currency. As tokens are redeemed, they will be destroyed until the fund is wound down completely.

By then, other Apex funds are planned to have launched.

“We plan to do this in a number of capacities,” Keshian said. The fund model will remain crypto-focused early on, but could take on other verticals later, he indicated. 

Rather than take out fees over the life of the fund, the Apex team will allocate 15 percent of the total pool of tokens as its management fee.

Bradley said, “What we’re really trying to do is lock that percentage in upfront and push as much value back to the token holders as we can.”

Bubbles image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

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ICO Mania Has Calmed Down a Bit – And That's Not So Bad

What do printed manifestos, football leagues and bathroom marketing have in common?

All three showcased that interest in initial coin offerings (ICOs) was alive and well at CoinDesk’s Consensus: Invest conference on Tuesday. But while attendees on the floor may have seen all the usual evidence of a frothy market, attitudes from investors and entrepreneurs surveyed appeared more dour. 

For example, while investors expressed no doubt about the promise of decentralization, they did voice broad skepticism about the majority of new coins on offer.

“I definitely feel like the mood around the ICOs has come down from being ultra, ultra hot,” Chase Lochmiller of Polychain Capital told CoinDesk.

Backed by Andreessen Horowitz and Union Square Ventures, Lochmiller said Polychain now has $400 million invested exclusively into the crypto market.  

Yet, one of the big themes from Consensus: Invest was the increasing sophistication of the larger crypto market, as it has added capacity in derivatives, exchanges and custody infrastructure. In contrast, most of the best tools are only available to traders in larger cryptocurrencies such as bitcoin and ether.

In other words, while retail investors may want into the ICO market, financial service providers haven’t been in a rush. That said, the ICO market is catching up to the dominant coins, as new cryptocurrency hedge funds begin allocating capital.

“I think having more investors in the space is helpful,” Lochmiller said, adding that it increases competition and the pressure on projects to produce, as well as giving the market legitimacy.

Lochmiller expects a lot of the financial instruments being built for bitcoin and ethereum now to eventually filter down to smaller tokens, and he sees opportunity in facilitating shorts.

“I think a very interesting space to tackle is the token lending market,” he said.

If someone wants a short, they need a way to find someone willing to lend the tokens they want to bet against. That scenario doesn’t exist yet. Still, it fits into a larger theme that came up throughout the day: how to bring more liquidity into smaller tokens.

“You have got to get trading volume,” Ian McAfee of Shift Forex said during his presentation.

One area of promise he sees is building exchanges with non-English user interfaces and in markets not denominated in the dollar or the euro.

Chicken and egg

But such an exchange will only get built if there’s demand for trades.

“It’s hard to know how much demand there is and how much noise,” a spokesperson for ShapeShift told CoinDesk. That’s why trading volume is one of the main data points the exchange, which facilitates trading solely between cryptocurrencies, looks at before adding a new asset.

“There’s certainly a lot on our radar we’d like to add,” the spokesperson added.

But adding a new token is not a negligible investment in terms of developer hours, and even as they do so, it’s still the big trading pairs that dominate, such as bitcoin to bitcoin cash.

For tokens built around solving a specific problem, trading volume is likely to stay light until their products are ready to go into operation, and then there’s the problem of whether or not the underlying protocols can actually handle demand.

“There’s not one of these blockchains that are even close to nearly fast enough to let any of these companies successfully run their businesses on,” Michael Novogratz, CEO of Galaxy Investment Partners said from the main stage.  

‘Rubbish’ tokens

Moving higher up the investor food chain to institutional investors, it’s hard to picture any of them taking new ICOs seriously until a more robust custodial ecosystem is in place.

But “after ether, there’s nothing for any of these other assets out there,” Daniel Matuszewski, Circle’s head of trading, said during one of the event’s main stage panels.  

And the market for tokens probably isn’t ready for those kinds of investors yet anyway.

In equities markets, it’s not unusual to invest in index funds that buy up huge swathes of the stock market, but cryptocurrencies aren’t ready for that kind of investing.

Crypto trader Willy Woo showed a graph of a thousand coins on one chart, explaining that if someone had bought all of them, they wouldn’t have made any money.

“There’s a lot of rubbish on the market,” Woo said.

“You really need to compare these to just investing into bitcoin over time,” Tetras Capital’s Alex Sunnarborg cautioned.

Bubble trouble?

Elsewhere, there was a sense that the market is seeking to reign in some of its excesses, or at least becoming more aware of their presence.

Linda Xie of Scalar Capital, for example, made something of an indictment of entrepreneurs rushing into the market with half-baked plans and no hard cap on the amount they want to raise.

“I’m concerned that there’s a project that will raise a hundred million dollars and they’ll get lazy and won’t do the work and they’ll run away with the money … I’m worried this will happen, people will realize it’s a bubble, and the thing will collapse,” she said.

But that doesn’t mean everyone viewed the froth as inherently bad in the long run.

“There’s certainly some bubblicious aspects to all this,” Mat Cybula, CEO of Cryptiv, said in breakout presentation, but “bubbles aren’t always the worst thing” he added.

Novogratz concurred, concluding:

“Bubbles happen around ideas that actually are right and change the world.”

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

Manifesto photo via Brady Dale for CoinDesk.

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Interested in offering your expertise or insights to our reporting? Contact us at news@coindesk.com.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

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Early Bitcoin Buyers Talk Bubbles and Origin Stories at Consensus: Invest

“I think it’s very important to make a distinction between a bubble and a fraud.”

So says Glenn Hutchins, the co-founder of private equity firm Silver Lake and one of the panelists this morning during CoinDesk’s Consensus: Invest event.

Appearing alongside Galaxy Investment Partners CEO Michael Novogratz and Brian Kelly Capital founder Brian Kelly, his remarks came during a wide-ranging discussion that touched on the valuation of tokens, the future of the industry and how both Hutchins and Novogratz first became involved with bitcoin.

For Novogratz – a long-time investor in bitcoin and ethereum who has predicted significant price gains over the next year – the “eureka” moment occurred once he and his partners began to investigate the technology more deeply, after initial purchases.

“So we went from owning BTC to investing in the ecosystem,” he said.

Hutchins quipped that he “bought BTC only as a last resort,” noting that he initially looked at the mining space as a possible place to invest – but in his own words, he “couldn’t figure out who was going to win.” Hutchins, as reported last year, later went on to become a board member for industry investment firm Digital Currency Group.

Yet the bulk of the conversation turned on two approaches to investing in cryptocurrencies: either the assets themselves or the companies working to build products and services around them. As Novogratz noted, it’s “hard” to find a firm working in the space that would have generated as much as a return compared to simply buying the assets themselves.

Novogratz went on to predict that the ecosystem is set for more proliferation of projects, though he posited that there won’t be many “winners” for each use case, citing examples like decentralized cloud storage and ride sharing.

“I don’t think you’re going to have lots of winners in each use case, but you’re going to have lots of different blockchains,” he said.

As might be expected, the conversation later turned to the argument that cryptocurrencies are either a bubble or a “fraud” – the latter argument being advanced most notably by JPMorgan Chase CEO Jamie Dimon.

For Hutchins, the “fraud” moniker is one that shouldn’t be tossed around so lightly.

“I think it’s very important to make a distinction between a bubble and a fraud. Even when there was a bubble, if you bought the best you would have made money,” he told attendees, adding: “I did not say this is a bubble.”

“I think this is going to become the biggest bubble of our lifetime by a longshot,” Novogratz said in reply, prompting Hutchins to say:

“I want the record to show I didn’t say that.”

Disclosure: CoinDesk is a subsidiary of Digital Currency Group.

Image by Nikhilesh De for CoinDesk

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.