Category: Bitcoin

Airfox SEC Cryptocurrency Alt-Coin Settlement Is Everything Coin Issuers Hoped to Avoid – Securities Act Analysis Applies to Token Issuances

Airfox settles with SEC and treats tokens like the securities they are

CarrierEQ, Inc. (Airfox) did an initial coin offering in October 2017. They raised about $15 million to finance their digital token-denominated ecosystem for playing with ads.

Not bad, right? After all, lots of people were saying how ICOs were a cheap, non-dilutive way to raise money because SEC rules didn’t apply.

The SEC didn’t agree, as it warned in the DAO Report.

For its trouble, Airfox will pay a $250,000 penalty, which is not too bad.

However, they must also:

  • Register the tokens under the Exchange Act; and
  • File periodic reports with the SEC.

So far, expensive but still less than $15 million.

Airfox says they’re pleased with the result:

“We are pleased with these developments. We believe by reaching this resolution with the SEC and MSD, we are removing uncertainty and positioning Airfox to grow our blockchain platform within a regulatory framework,” said Victor Santos, CEO and co-founder, Airfox.

I doubt it. They must also offer rescission rights to everyone who bought their tokens from the Company.

Here we go.

Airtokens were issued at about $0.014 per token (they issued 1.06 billion tokens for $15 million).  They are currently worth about 1/10 of that. If you invested, would you get your money back if you had the chance?

For their sake, I hope Airfox had another source of funding.

Expect more of this from the SEC:

“By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

Other notes:

  • The Massachusetts Securities Division was also involved, and it has been active in trying to police these activities.
  • Paragon Coin also settled with the SEC.  Paragon wants to integrate blockchain and the cannabis industry.
The Airtoken ecosystem.

Better Than Bitcoin? Fund Manager Discusses Disruptive Tech In Finance

Former co-head of largest bond fund discusses what can really disrupt entrenched businesses.

Logo - Bitcoin
Not the most disruptive finance technology.

Kicking Bitcoin while its down, Mohamed El-Erian penned an article for CNBC about how technology is taking on finance. In his words “via a democratization process that could gradually reconfigure a notable part of the institutional landscape, particularly in consumer finance, while challenging regulators to adapt.”

While most people would think “Bitcoin,” El-Erian doesn’t even consider it a good example. He claims its impact, “both actual and potential, is relatively limited when compared to ongoing attempts to enhance and democratize lending, borrowing, investing, and payments and settlements.”

El-Erian notes his take on the sequence for disruptive tech:

  • A bold innovation suddenly lowers entry barriers for certain activities;
  • Mechanisms emerge to enable a larger part of the population to participate in what is deemed desirable but, until now, had been hard to access;
  • As the disruptive forces gain traction, existing business models face difficult adaptation challenges, and regulators begin to fall behind; and
  • The situation is often amplified by a natural human tendency to overproduce and over-consume hitherto restricted goods and services.

He sees this happening in finance, though the pace is less frantic and less disruptive. According to El-Erian, examples include:

  • Internet-driven lending and borrwoing clubs
  • peer-to-peer initiatives in consumer financial services
  • Digital wallets
  • Mobile transfers

He suggests that they reduce costs and provide “fairer risk-pooling outcomes and better credit underwriting.” He doesn’t mention that none of these ideas are particularly new. He does mention that the prospects for each vary considerably.

While this was not the most insightful article on the subject, it is hard to dismiss El-Erian’s statements, given his former position as CEO and CIO of PIMCO, home of the largest bond fund.

Bitcoin Ban – U.S. Senator Demands Regulators Ban Bitcoin

Bitcoin ban urged by Sen. Manchin, previously best known for a compaign commercial where he used a shotgun to shoot a copy of the Cap and Trade bill.

Senator Joe Manchin (D-WV) sent a letter to federal regulators demanding a ban on Bitcoin.

Should we be surprised?  Well, as one particularly brilliant commentator stated:

“There has been a lot of news lately about the efforts of a variety of U.S. regulators to understand Bitcoin, and these regulators are not in the business of exempting financial products that compete with government issued currencies or act outside of the established financial regulatory environment. . .

As a result of all of the above, there is substantial expense and risk in using and accepting Bitcoins, as there should be a risk premium attached due to the very real possibility that the U.S. and other governments could shut them down.”

Other countries, such as China, India, Japan and Russia have either moved to ban or restrict Bitcoin or have threatened to do so.

In addition, Bitcoin has been under review in the U.S. as well.

And now, we have a U.S. Senator urging an outright ban because Bitcoin is unregulated (which is arguable, but for reasons we don’t need to get into here).

As Sen. You-Kids-Get-Off-My-Lawn said, Bitcoin is:

“highly unstable and disruptive to our economy. For the reasons outlined below, I urge regulators to take appropriate action to limit the abilities of this highly unstable currency.”

He is also using the criminal use of Bitcoin as an excuse.  He discussed the “deflationary nature” of Bitcoin, technical problems around Mt. Gox (which I cannot believe he understands in the least) and volatility as other reasons to ban it.  He even trotted out the Consumer Price Index!

He also had to include a softball to “hard-working Americans” in his letter in his final hit:

“The clear ends of Bitcoin for either transacting in illegal goods and services or speculative gambling make me weary of its use.  The Senate Homeland Security and Governmental Affairs Committee issued a report just this month stating, “There is widespread concern about the Bitcoin system’s possible impact on national currencies, its potential for criminal misuse, and the implications of its use for taxation.” Before the U.S. gets too far behind the curve on this important topic, I urge the regulators to work together, act quickly, and prohibit this dangerous currency from harming hard-working Americans.”

If the “clear ends of Bitcoin” are for illicit activities, why not put the risk of deflationary pressures and volatility on the persons engaging in such activities?  Whatever.

Bitcoin’s pricing will smooth out once there is greater acceptance in the marketplace.  It should not surprise anyone that a relatively new currency experiences volatility or that a new technology experiences some bugs.  The early adopters will absorb the early losses, and changes addressing the early problems may generate the trust that allows for widespread usage.

However, as I have said from the beginning, the risk of Bitcoin lies not with technology or the vagaries of market pricing.  The risk of Bitcoin lies with regulation.  The U.S. government is not in the business of allowing non-government sanctioned currencies or payment channels to exist.

Sen. Marlboro Man gets tough with a pile of paper.

 

First Public Bitcoin Company, An Ecommerce Reseller Of Consumer Products, Goes Public Using A Reverse Merger

First Bitcoin public company (sort of) went public through reverse merger.

Charles Allen, CEO and CFO, of Bitcoin Shop recently went on CNBC to discuss why a reverse merger was the best choice for his company to go public. His reasons included:

  • Publicity from being public
  • Transparency
  • Time to market, merger done in three weeks
  • They wanted to be the first public Bitcoin company
  • Ability to raise funds

For this post, let’s overlook my opinion that reverse mergers are generally a terrible idea. You never know what you are getting into, such as Bitcoin Shop’s recent extensive revisions of two years worth of financial disclosures following the notice of nonreliance on previously issued financial statements and audit reports.

Logo - Bitcoin
Bitcoin Shop goes public through a reverse merger transaction.

There are private companies that not only can navigate the process, but have the systems set up to successfully transition to being a public company. However, they are few and far between. In addition, the fundraising seldom materializes.  To Bitcoin Shop’s credit, they did raise about $1.8 million in a private placement related to the reverse merger.

As to Bitcoin Shop’s Bitcoin-related business, as Mr. Allen described on CNBC, it basically is an affiliate seller of products for other sites. It lists products and permits payment by Bitcoin. It has a goal to be a leading virtual currencly marektplace, but it is not a “Bitcoin” company. It markets stuff sold by others and processes payment and takes fees. It currently has a single vendor, but it plans more.

Bitcoin Shop may be able to earn revenue through markups on products and processing fees and undercut credit and debit card processing fees. Time will tell if this is a viable strategy. But, for all of the technical discussion in its investor presentation and SEC filing discussion the transition, Bitcoin Shop is an ecommerce company that lists products for sale by another vendor and processes payment denominated in Bitcoin.

There is nothing wrong with that, and I would not be surprised to see many more follow suit. However, I am reminded of seemingly hundreds of companies with little relationship to technology slap a “.com” at the end of their name back in the 1990’s. Is history repeating itself?

 

Bitcoin Regulation Urged In New York Hearing

Bitcoin regulation the subject of FINANCIAL hearings in New York. This is my surprised face.

I have been fascinated at the way Bitcoin seems to be going mainstream. My practical side recognizes the risk that governments will not let Bitcoin be Bitcoin. Governments are not in the business of allowing uncontrolled currencies to roam free. See, for example, here and here.

Now comes news that financial regulators in New York and California are exploring ways to regulate the elecctronic currency.

Bitcoin
Bitcoin regulation seems to be underway in New York and California.

In hearings by New York’s top financial regulator, law enforcement officials practically declared Bitcoin to be a financial dirty bomb.

“Mr. Zabel went through a list of six ways in which virtual currencies are more prone to crime than current forms of money transfer, including the ease with which money can be laundered over borders at the click of a mouse.”

There was the predictable noise about not discouraging growth while limiting illegal activity.

“Mr. Lawsky has indicated that Bitcoin is becoming popular enough that regulators need to create regulations that can encourage its growth but limit illegal activity. . . but there has also been a growing list of serious crimes committed in the Bitcoin network, which government officials have struggled to clamp down on.”

Well, one high profile crime ring, anyway.

The law enforcement officials disputed the contention of Bitcoin defenders that Bitcoin is no worse than other currencies for illegal activities. This despite the fact that those testifying were the ones able to nab Bitcoin-denominated criminals.

“Mr. Zabel was involved in the team that tracked down Ross Ulbricht, whom the authorities contend is the owner of the Silk Road online market, where drugs and child pornography were available. Mr. Ulbricht used a so-called Tor network to obscure himself, the authorities said, and Mr. Zabel said it was only after overcoming “substantial hurdles” that his office found Mr. Ulbricht.”

Well, there are hurdles in any investigation and prosecution, as Law and Order has taught us, such as the anonymous use of cash.

However, the unclear status of Bitcoin’s legality continues to be a pressing issue. For those already creating businesses in that space, expect rent-seeking and proposals for regulations that protect more established players.

““Regulation could be a good thing,” said Fred Ehrsam, the co-founder of Coinbase, the largest middleman for Bitcoin transactions.”

 

Bitcoin Regulatory Risk Begins In India

Bitcoin under attack in India. First a warning, then a raid.

I have previously discussed the risks involved in dealing with Bitcoins, which are primarily regulatory.

Bitcoin
Bitcoin regulatory risks become reality in India.

I must be psychic, or at least recognize that regulators do what they do:  shut down what they cannot understand or control. The Bitcoin risk is becoming real.  First, The Reserve Bank of India issued a warning to people dealing in Bitcoin about the risks involved in dealing in Bitcoin.  Were they just being helpful?

The warning did not explictly say that dealing in Bitcoin was illegal, but it offered this bit of foreshadowing:

“The Reserve Bank has also stated that it is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.”

A couple of days later, Indian authorities raided a Bitcoin trading platform, buysellbit.com.in.  The Enforcement Directorate conducted the raid since the central bank does not provide permission to indulge in such transactions [Ed.:  We assume something was lost in translation here, but you get the idea.]

“’We are gathering the data of the transactions, name of the people who have transacted in the virtual currency from Gupta’s server that is hired in the US. At present, we believe that this is a violation of foreign exchange regulations of the country. If we are able to establish money laundering aspect then he can be arrested,’ said a top ED official.”

Coming soon to a U.S. regulator near you?  An arrest of another Dread Pirate Roberts in the next Silk Road-type incident could be the catalyst for a crackdown, but I doubt it would take that much.  We can all watch in 2014 whether Bitcoin goes mainstream enough to avoid a government response.  However, that didn’t work for e-gold or PayPal in the 90’s or online poker in 2011.

Bitcoin Edges Closer to Mainstream As It Attracts Serious Venture Capital

Bitcoin seems to moving away from its seedy reputation as a digital currency for the underworld.

Coinbase, a San Francisco based startup founded in June 2012.  It provides a Bitcoin “wallet and platform where merchants and consumers can transact with the new digital currency bitcoin.”  If you look at their ‘About‘ page, their kitchen looks spiffy.

Coinbase announced a $25 million funding round led by Andreessen Horowitz and including Union Square Ventures and Ribbit Capital, both existing investors.  This brings their funding to $31 million, including the $6 million they announce on their website.  Representatives of Andreessen Horowitz and Union Square will join Coinbase’s board.

According to Bloomberg, other high profile VC firms have invested in Bitcoin companies, such as Tim Draper and Founders Fund.  Otherwise, we have seen novelty acts in this space, such as the Winklevoss Bitcoin ETF.

Much of the trepidation around Bitcoin stems from the regulatory issues.  Basically, many people (me included) expect the U.S. federal government to view Bitcoin with hostility, despite recent noises that they are okay with it.  To that end, Coinbase says that they will be spending a lot of money for licenses with state regulators.

 

 

The Risk Of Bitcoins

Cross-posted at Underdisclosed.com.

I have been getting my share of Bitcoin-related inquiries lately.  Here are some thoughts regarding the risk of engaging in Bitcoin-denominated transactions.

In my view, the biggest risk of Bitcoins is the regulatory issue.  This risk exist whether you conduct Bitcoin-denominated business or trade Bitcoins like you would with any other currency.

There has been a lot of news lately about the efforts of a variety of U.S. regulators to understand Bitcoin, and these regulators are not in the business of exempting financial products that compete with government issued currencies or act outside of the established financial regulatory environment.

Governments in general, the U.S. government in particular and state governments particularly are wary of alternative financial vehicles.  The U.S. government does not have a particularly good track record even where the law would seem to be on the side of the financing vehicle.  For example, the U.S. and state governments went after Paypal while it was in its IPO process.  In addition, there have been several “e-gold” currencies in the past that have failed for a number of reasons, from criminal behavior on the part of the principals to allegations of the currencies being used for fraud or money laundering.  There has also been a crackdown on activities of banks and financial institutions that attempt to evade U.S. laws by locating offshore or on Indian reservations.

In addition, there are the governmental concerns with tracking financial transactions for purposes of combating money laundering, drug trafficking and terrorism, and I cannot imagine that the government would exempt Bitcoin from these extensive regulatory obligations.  However, I am not sure Bitcoin would be in a position to comply with them.  This would make Bitcoin difficult to use in the U.S. or by U.S. persons and subject the creator(s) of Bitcoin to substantial risk, even as secretive as they are, as the head of founders of PokerStars, Full Tilt Poker and Absolute Poker could tell you.

As a result of all of the above, there is substantial expense and risk in using and accepting Bitcoins, as there should be a risk premium attached due to the very real possibility that the U.S. and other governments could shut them down.

 

SEC Pounces on Bitcoin Ponzi Scheme – In Securities Fraud, Everything Old Is New Again

Movie critics would call the scheme cliched and hackneyed.
Link:  SEC Charges Texas Man With Running Bitcoin-Denominated Ponzi Scheme

This week, the SEC charged McKinney, Texas-based Trendon T. Shavers with defrauding investors in a Ponzi scheme involving Bitcoin.  He may have raised more than $4.5 million in the scheme, but due to the Bitcoin-denominated transactions and vague SEC release, it is hard to tell.  The SEC also says that in more recent dollars, the 700,000 Bitcoin raised exceeds $60 million, which screams “We Want Headlines!!!!” to me.

Shavers’ vehicle was called Bitcoin Savings and Trust and he used the names “Pirate” and “pirateat40” to sell his dirty wares.  Despite the scary name, Shavers is probably just a Jimmy Buffet fan.

Jimmy Buffet, A Pirate Looks At Forty

The SEC claims Shavers claimed that investors would have no risk and huge profits over the Internet.  It appears that Shavers took in Bitcoin investments and then sent them out in withdrawals and interest payments while losing money in his investments and siphoning off funds for himself.  This is classic Ponzi scheme.  Nothing new or notable other than the Bitcoin angle, which isn’t that interesting considering other schemes that are far more imaginative.

 

Winklevoss Twins (Of Facebook Fame) To Create A Bitcoin ETF

The Winklevoss Twins, best known for their supporting role in the early Facebook saga, have filed a fascinating registration statement. The Winklevoss Bitcoin Trust has made a filing with the SEC to register around $20 million of Winklevoss Bitcoin Shares.

The point of this investment will be to reflect the performance of the “Blended Bitcoin Price” of Bitcoins. This price is the weighted average market price of Bitcoins on Bitcoin exchanges chosen by the Winklevosses.

The Winklevosses intend for the Trust to hold Bitcoins “using the Trust’s proprietary Security System,” whatever that means for a digital asset.

While this is sort of novel and interesting in its own way, what I found most fascinating is the fact that the financial statements filed with the Form S-1 were blank. Completely blank.

While initial registration statement filings often contain blanks, I’ve never seen “Form of Financial Statements” before. Financial statements may change over the course of a filing history, such as in response to SEC comments. However, it will be interesting to see if the SEC sends the Winklevosses a bedbug letter for this filing.

Best line from The Social Network.