The Canadian Securities Administrators (CSA) released a Staff Notice this week (June 11, 2018) providing additional guidance on the securities law implications for offerings of coins and tokens.  The notice was prepared by the CSA in response to common inquiries from cryptocurrency businesses and their advisors. Specifically, the notice addresses the sale of “utility tokens” and identifies scenarios where these sales may also have elements of investment contracts and be subject to securities regulation.  

 

On the topic of utility tokens, CSA Staff Notice 46-308 states:

“We have received submissions from businesses and their professional advisors that a proposed offering of tokens does not involve securities because the tokens will be used in software, on an online platform or application, or to purchase goods and services. However, we have found that most of the offerings of tokens purporting to be utility tokens that we have reviewed to date have involved the distribution of a security, namely an investment contract. The fact that a token has a utility is not, on its own, determinative as to whether an offering involves the distribution of a security.”

 

The notice goes on to highlight a few common scenarios for proposed coin and token offerings that could give rise to various securities law implications.  These scenarios include situations where:

  • A token is intended to be used in the operation of software or an online application that does not yet exist or is still under development, or the token is intended to be used to purchase goods and services that are not yet available
  • Tokens are not immediately delivered to buyers once purchased
  • The stated purpose of the offering is to raise capital, which will be used to increase the coin or token’s value or support the business issuing the coin or token
  • A business offering the coin or token or involved in its sale makes statements suggesting that the coin or token will become more valuable, or take other steps to create an expectation of profit

 

The CSA advises that any business seeking to offer coins or tokens to Canadians consult qualified securities legal counsel.  The CSA also invites applications to the CSA Regulatory Sandbox, which allows fintech companies an opportunity to test and develop innovative business offerings in an environment where they can work collaboratively with regulators and have temporary exemption from some consequences of securities regulation that may otherwise apply.  The sandbox approach to regulation is something that has also been pursued in Bermuda and the UK.

Who are the Canadian Securities Administrators (CSA)?

While most countries have national securities regulators, Canadian securities regulation is solely the jurisdiction of provincial and territorial governments.  The Canadian Constitution divides powers between the federal and provincial government and gives provinces the jurisdiction to regulate property and civil rights.  These provincial and territorial regulators are participants of the Canadian Securities Administrators, which is an organization that aims to promote consensus and harmonized regulations across the different jurisdictions.

 

What are “Staff Notices”?

Staff notices are issued either by a single regulator or by a group of regulators, such as the CSA.   Staff notices do not change securities legislation, reporting requirements or other policies and procedures.  Instead, the notices provide businesses and the public with insight into how regulators are interpreting and applying existing regulations.  The notices often focus on recent issues or areas of concern for the regulator and attempt to provide guidance on these matters to businesses and other market participants.  

The United States Securities and Exchange Commission (SEC) is vehemently opposed to a common crowdfunding practice in the cryptocurrency industry called the initial coin offering (ICO). An ICO is similar to an initial public offering where a company or corporation raises investment capital by offering its stock to the public for the first time. Only in an ICO, a digital currency or token is distributed instead of a stock, and the token can have a variety of uses that blur the line of what defines a traditional security.

Still, the SEC believes that the way ICOs are funded has them falling under security laws, and the companies interested in launching an initial coin offering need to comply with SEC private placement rules and investor protection guidelines. Those that fail to comply, may be subject to cease and desist letters in the future, as has happened with a number of US-based ICOs.

To further warn potential investors of the dangers initial coin offerings, the SEC has published a website on the increasingly popular capital raising method, providing what the SEC calls the “three ‘Rs’ of ICOs: Risks Rewards and Responsibilities.”

The website reads:

“Companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities. While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets.’

The list of potential risks, rewards, and responsibilities is directed both at investors and potential ICO issuers and cover off on how initial coin offerings could be securities, may need to be registered with the SEC, or may pose “substantial risks.” To avoid those risks, the SEC warns investors to do their own research, ask questions, to understand the product, and to take extreme caution if and when an investment sounds “too good to be true.”

The SEC also takes the opportunity to warn would-be ICO issuers, asking them to “use caution before promoting offers and selling coins.”

A month ago, the SEC launched a fake ICO website called HoweyCoins.com to provide a working example of what a fraudulent ICO may look like. Investors who clicked on any of the fake site’s ‘buy now’ buttons, were redirected to educational materials on what red flags to look out for when considering investing in an ICO.

[Image Credit: WikiMedia Commons]

bithumb

On June 7, 2018, South Korean Cryptocurrency Exchange Bithumb released the results of a user survey called, “Cryptographic Investment Trends.” It captured the perspective of 2,507 virtual currency investors over the age of 20. The survey included questions on investment plans and government regulations. A notable finding was that 42.8 percent of those surveyed plan to “hodl” or keep their crypto-investments over the long term. A Bithumb press release authored by “Bitsumm manager” states:

As cipher money continues to be recognized as an asset in major industrialized countries, the perception of cipher money investment is gradually matured by domestic investors.

Bithumb Survey Findings

The Bithumb survey discovered that the older the cryptocurrency buyer, the more likely they are to plan to hodl and make longstanding investments. Here are the percentages of each age range that plan to preserve their holdings:

  • Investors in their 20s: 30.8 percent
  • 30s: 40.3 percent
  • 40s: 45.3 percent
  • 50s and older: 49.1 percent

Bithumb also shares that 39.5 percent of those surveyed plan to keep their investments, even if the government requires them to pay capital gains taxes, or taxes levied on profits from the sale of assets, on cryptocurrency. This is an 11 percent increase over Bithumb survey data from a year ago. About 13.1 percent responded that they would completely stop investing in digital money if this tax is imposed. The exchange concludes, “more and more investors are looking at cryptographic money as assets and looking for stable investments.”

Bithumb was founded in 2015 and is one of one of the largest exchanges in South Korea. The survey was conducted between April 30 and May 6, 2018, through Bithumb Cafe, Bithumb’s official communication channel.

Other South Korean- and Bithumb-related News

South Korea continues its tumultuous journey to establish crypto-trading regulations, which included discussion of a total ban in January 2018.

Bithumb recently made regulatory headlines when it announced it would ban users from 11 countries in late May 2018 as part of its anti-money laundering or AML policies. Specifically, citizens of countries labelled as Non-Cooperative Countries and Territories, or NCCT, were banned as of May 28. NCCT countries are noncompliant with the standards set out by the Financial Action Task Force on Money Laundering, or FATF, an intergovernmental organization established by the G-7 in 1989. This group of countries includes North Korea, Iran, Iraq and Sri Lanka.

Bithumb stated in a related press release:

We will strictly enforce our own rules and protect our investors, and we will actively cooperate with the authorities. We will lead the standards of the Worldwide Codex Exchange with autonomous regulation ahead of schedule.

Earlier in 2018, South Korean exchanges including Bithumb banned anonymous cryptocurrency trading.

As of May 2018, Yoon Suk-heun, the new governor of the country’s Financial Supervisory Service, is reportedly considering relaxing cryptocurrency regulations.

The featured image is a collage featuring the Bithumb logo (credit: Bithumb) and a public domain survey image.

Reddit and GitHub user iminehard noticed their cellphone experienced interference while near their impressive GPU mining farm. Following this, iminehard investigated the issue and found that there was a definite increase in noise around a specific LTE range. iminehard’s testing methodology and results are covered in more detail below.

“TL;DR – Large number of GPUs in open air crypto currency mining “rigs” emit substantial spurious emissions/noise on portions of the LTE spectrum used in the United States.”-GitHub and Reddit user iminehard

Testing for interference

iminehard documented their testing methodology along with their results. Testing made use of a Laptop, an RTL-SDL tuner, and an omnidirectional antenna for said tuner. SDL, or Software Defined Radio, allows you to use a computer to capture and produce RF signals, using its CPU to process the signals. This is different from regular radio, which uses specialized hardware to process the signal. Iminehard used this to capture the frequencies on which LTE operates.

Chart comparing parts of the RF spectrum between tests
Mining in blue, idle in green

The first pair of tests iminehard performed was a single GPU inside a case, first at idle, but overclocked and with fans on, and the second with the mining software bminer running. No perceptible difference can be seen on the charts comparing the LTE spectrum between the two tests. The lack of difference between the charts could mean a few things. Namely, it could mean that the case used blocked or grounded out the interference. Otherwise, it could mean that the interference generated by a single GPU is undetectably negligible.

Moving forward, iminehard tested their mining farm, with interesting results:

 

iminehard's GPU mining farm
iminehard’s GPU mining farm

iminehard used the same testing method that was used above on their farm. And unlike the previous test, there was a significant change in what iminehard called “range 1” of the LTE spectrum used by the United States (617-746 MHz).

Chart of RF spectrum showing the difference between tests
Mining in blue, idle in green. Sourced from iminehard’s investigation on GitHub

Results of interference

As shown above, there is some definite interference caused by large-scale GPU farms. This interference may cause service disruptions for those trying to use cell phones within the field. Due to the fact that this may cause service interruption, the farms may break federal laws regarding intentional interference. Or may cause the FCC to come knocking on your door asking you to knock it off.

Shielding to prevent interference

The above tests were performed on ‘open’ GPUs. ‘Open’ referring to the fact that the GPUs were not mounted in a metal case. A metal case may provide some shielding for the interference that the GPUs release, either due to grounding or construction. Aside from being sure to mount all GPUs in a real case, one could build a Faraday cage around the entire farm. A correctly built faraday cage should contain all the interference within the cage. One major downside to using a Faraday cage is that Faraday cages are conductive. If it collapses, it could damage equipment.

coin renders

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Image courtesy of Carty Sewill, http://cartyisme.com/