China and SEC Excerpt 8 Bitcoin Billionaire

Excerpt 8
Mrs. Dalia Blass is without question the most important person in the world when it comes to investments in crypto currencies. As of August 31, 2017, she is the new Director of the Division of Investment Management for the United States Securities and Exchange Commission. She was a perfect fit for the position and is well connected and well traveled. She has developed a well-rounded world-view having studied Political Science and Business at the University of Cairo. She worked abroad and acquired experience in European Financial Markets when she spent four years as an associate lawyer at Shearman & Sterling LLP in London, England. While she was there her husband David Blass was also working in London as an associate lawyer with Davis Polk & Ward LLP. Dalia and David both graduated from the University of Columbia School of Law in 1998. Dalia and her husband David have had stellar careers within the Securities and Exchange Commission which is headquartered in Washington, DC.
Dalia came to public prominence recently during her short hiatus away from the agency while she represented Tyler and Cameron the Winklevoss twins in a well publicized lawsuit against Mark Zuckerberg and Facebook. Mark Zuckerberg is a young billionaire fifty-six times over, who along with his wife reportedly wishes to donate their fortune to charity .

The twins are perhaps the most motivated contestants in the first Bitcoin Billionaire race as they are no doubt eager to break into the elite Billionaire’s Club as Zuckerberg did with what they claim was their idea from Harvard University. They walked away from the suit with Facebook with a reported settlement of $65 million and were seeking new opportunities in Bitcoin. Their idea was to stay in New York State and set up an ETF or exchange traded fund on the Bats -BZX exchange, and attempt to comply with all of the stringent federal regulations and the New York State’s Department of Financial Services new BitLicense requirements rather than setting up shop on the west coast in California.
The BitLicence regulates exchange services which are defined as meaning the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; and Fiat Currency means government-issued currency that is designated as legal tender in its country of issuance through government decree, regulation, or law; Virtual Currency means any type of digital unit that is used as a medium of exchange or a form of digitally stored value. Virtual Currency shall be broadly construed to include digital units of exchange that have a centralized repository or administrator; are decentralized and have no centralized repository or administrator; or may be created or obtained by computing or manufacturing effort. Virtual Currency shall not be construed to include any of the following: digital units that are used solely within online gaming platforms, have no market or application outside of those gaming platforms, cannot be converted into, or redeemed for, Fiat Currency or Virtual Currency, and may or may not be redeemable for real-world goods, services, discounts, or purchases.

The Securities Exchange Commission regulates Wall Street and all Investments offered to the public under the federal Bank Security Act which was later modified by the Patriot Act of 2001,
or Providing Appropriate Tools Required to Intercept and Obstruct Terrorism to include AML Anti-Money Laundering and KYC Know your client regulations. This had unexpected consequences such as ending the American’s of Irish decent funding of the difficulties in Ireland because of the much greater scrutiny of money transfers after the terrorist attacks on September 11, 2001. The Sarbanes-Oxley Act of 2002 (SOX) overhauled regulation of the audit profession and effectively ended 100 years of self-regulation relative to public company audits. Crafted in response to financial scandals that occurred at several large public corporations, SOX also dramatically altered the legal and cultural guideposts for corporate America. In addition, it established a comprehensive framework to reform corporate governance, enhance financial reporting, regulate public company audits and strengthen auditor independence.

It is unlikely that Dalia Blass crafted the SEC bulletin which became the law of the land for ICO’s DAOs and crypto currency exchanges in America. It was released on July 25, 2017 five weeks prior to her being hired back at the SEC in her new top job. The new head regulator comes to the job at a time that her agency is watching with interest a legal battle between the US government and Coinbase the largest crypto currency exchange in the United States. Brian Armstrong the CEO of Coinbase is fighting the action all the way. The federal Department of Justice is applying to federal court for a so-called John Doe summons to Coinbase on behalf of the Internal Revenue Service. I quote from the court filings by the DOJ:

1. The “John Doe summons relates to the investigation of an ascertainable group or class of persons, that is ,United States taxpayers who, at any time during the years ended December 31, 2013 through December 31, 2015, conducted transactions in convertible virtual currency as defined in IRS notice 2014-21.
2. There is reasonable basis for believing that such group or class of persons may fail, to comply with one or more provisions of the internal revenue laws.
3. The information sought to be obtained from the examination of the records (and the identity of the persons with respect to those tax liabilities the summons will issue) is not readily available from other sources.

The Investor Bulletin on Initial Coin Offerings was posted on the SEC official website concerning the findings of an investigation into the DAO or Distributed Autonomous Organization fiasco that had taken place when Slock-it had raised far more cash than they could safely manage in an ICO. Over two hundred million dollars were raised in that offering. The DAO tokens crypto currency were stolen by the DAO black hat hacker, in what came to be known as an exploit of a recursive calling vulnerability. Basically the bad actor asked for a withdrawal from his or her account, got the tokens, then asked again before the system could update the balance. More funds where removed than the account held making all token vulnerable, there were massive flows of tokens millions and millions of dollars per hour were draining to a so-called child account the hacker also owned. White hat hackers promptly stole the tokens back from the black hats account. Suffice it to say it was a complete circus that went on for almost three months. Actually, it is still going on because that was the origins of Ethereum Classic which has sanitized itself and become a legitimate operation once again. Vitalik and the Ethereum Foundation showed good judgement in not wasting time and energy fighting the forked clone. Many people had urged Vitalik and the Ethereum Foundation to sue Ethereum Classic over trademark issues; but he simply went on about his business over in China and Singapore, and gave Barry Silbert and Charles Hoskinson free reign over his discarded token.
I was busy at the time because of the big forest fire in Fort McMurray Alberta where my oil service business was headquartered. It was easily Alberta’s worst forest fire on record. The Canadian Red Cross and the Canadian Government made urgent appeals for Canadians to donate money to help the city which was devastated. The Red Cross was very proud of the unparalleled response in donations, a hundred- million Canadian dollars in week and a half. How did these kids in London and Paris with their unknown ICO of a DAO token on the new Ethereum blockchain ever manage to raise over two-hundred million USD in the same time period?

The bulletin that gave regulatory guidance to the crypto currency and blockchain industry came out on July 25, 2017 from the Securities and Exchange Commission and I will quote from it:

Developers, businesses, and individuals increasingly are using initial coin offerings, also called ICOs or token sales, to raise capital. These activities may provide fair and lawful investment opportunities. However, new technologies and financial products, such as those associated with ICOs, can be used improperly to entice investors with the promise of high returns in a new investment space. The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to make investors aware of potential risks of participating in ICOs.
Background – Initial Coin Offerings Virtual coins or tokens are created and disseminated using distributed ledger or blockchain technology. Recently promoters have been selling virtual coins or tokens in ICOs. Purchasers may use fiat currency (e.g., U.S. dollars) or virtual currencies to buy these virtual coins or tokens. Promoters may tell purchasers that the capital raised from the sales will be used to fund development of a digital platform, software, or other projects and that the virtual tokens or coins may be used to access the platform, use the software, or otherwise participate in the project. Some promoters and initial sellers may lead buyers of the virtual coins or tokens to expect a return on their investment or to participate in a share of the returns provided by the project. After they are issued, the virtual coins or tokens may be resold to others in a secondary market on virtual currency exchanges or other platforms. Depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities. If they are securities, the offer and sale of these virtual coins or tokens in an ICO are subject to the federal securities laws.

Sponsors involved in an exchange of something of value for an interest in a digital or other novel form for storing value should carefully consider whether they are creating an investment arrangement that constitutes a security. A market participant engaged in offering an investment opportunity that constitutes a security must either register the offer and sale of the security with the Commission or structure it so that it qualifies for an exemption from registration. Market participants in this area must also consider other aspects of the securities laws, such as whether a platform facilitating transactions in its securities is operating as an exchange, whether the entity offering and selling the security could be an investment company, and whether anyone providing advice about an investment in the security could be an investment adviser.
I find the next portion to be somewhat confusing. I think it may be worded this way to distinguish between stocks which involve the efforts of others and bonds which are really just passive debt instruments.

‘A security is an investment of money or value in a business or operation where the investor has a reasonable expectation of profits ‘based on the efforts of others’.

To me if your Ford shares go up in value it may be due to the work of the Ford employees and Ford’s management efforts, but it might have gone up because of rumors of a takeover or acquisition and not the efforts of others. The key wording is ‘the efforts of others’ and the SEC’s eighteen page document devotes the most time to this one of the four criteria albeit the DAO was found to meet every one of the four- point criteria. Apparently, the case law for these four points required to be deemed a security is referred to simply as “Harris”.

Anti-Money Laundering AML

On March 5, 2010, FinCEN, the Securities and Exchange Commission, and the Banking agencies (the Federal Reserve, Comptroller of the Currency, Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration) in consultation with the CFTC, issued guidance addressed to the core requirement to develop and implement internal controls, policies and procedures as part of a firm's anti-money laundering program. The guidance clarifies regulatory expectations for obtaining beneficial ownership information for certain accounts and customer relationships, particularly those that present a high risk for money laundering or terrorist financing. If anyone in the chain of agents, brokers, bankers, accountants, or lawyers and clerks has any reason for suspicion they must by law fill out a SAR. A suspicious activity report and then consult the Office of Foreign Assets and Control. The Patriot Act authorizes Treasury to find that a foreign jurisdiction, institution, class of transactions, or type of account is of "primary money laundering concern" and to require domestic financial institutions to take certain "special measures" against the primary money laundering concern. The first four special measures impose information gathering, reporting, and recordkeeping requirements on those financial institutions dealing, directly or indirectly, with the designated jurisdiction or entity. Under special measure 5, a financial institution may be prohibited from opening or maintaining a correspondent account or a payable-through account.

International Transportation of Currency or Monetary Instruments or CMIR
The BSA requires the filing of a Form 105, Report of International Transportation of by any person, who physically transports, mails, ships, or causes to be physically transported, mailed, or shipped, currency or other monetary instrument in an aggregate amount exceeding $10,000 on any one occasion, whether that transportation is into or out of the United States. A CMIR also must be filed by any person who receives in the United States currency or other monetary instrument in an aggregate amount exceeding $10,000 that has come from outside the United States and on which no CMIR was filed. FinCEN, administers the BSA and is charged with safeguarding the financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity has delegated authority to issue regulations requiring financial institutions to keep records and file reports on certain financial transactions. FinCEN's website provides general
information and updates about AML and the BSA relevant to all financial institutions.

The Foreign Bank and Financial Accounts FBAR
If an American has over $10,000 at any time of the year in a foreign bank account they must fill out and submit Form TD F90-22.1 ‘Report of Foreign Financial Accounts’. A blockchain.info Bitcoin wallet might conceivably meet this criteria.

The Commodity Futures Trading Commission CFTC
The Commodity Exchange Act (CEA) regulates the trading of commodity futures in the United States. Passed in 1936, it has been amended several times since then. The CEA establishes the statutory framework under which the CFTC operates. The SEC rejected the Winklevoss bid for an ETF based on the price of Bitcoin but indicated that an application to the Commodity Futures Exchange might be approved.

Countering the Financing of Terrorism (CFT)
Companies that do not want to run afoul of the law often use the services of the Canadian business information company Thomson- Reuters with their ‘World Check’ risk Intelligence , and their ‘Enhanced Due Diligence’ package. The company says Enhanced Due Diligence reports are often used: Before mergers, acquisitions, or joint ventures or when automated risk information screening reveals risk. When on-boarding high net worth or high-profile clients and as a key component of a comprehensive compliance program. The services can also be used for screening distributors, supply chains, intermediaries, and multinational companies. It is especially useful for ‘Politically Exposed Persons’, bribery, corruption, labor practice, and financial crime screening. The service is vital where geopolitical risk information analysis flags a transaction or individual as linked to a high-risk jurisdiction or country. With the Clarient and Avox acquisitions, Thomson Reuters empowers the digital economy by enabling banks and their customers to easily exchange the information required to do business. Through the acquisition, the world’s biggest banks (Barclays, Credit Suisse, Goldman Sachs, JP Morgan, and State Street) are among those who have integrated their KYC solution – Clarient – into ‘Org ID’. Org ID streamlines the KYC/CDD (Know Your Client /Customer Due Diligence).

The Foreign Corrupt Practices Act (FCPA) is another worrisome piece of legislation that any American company wishing to do business with foreigners or in foreign jurisdictions should be familiar with. The law has teeth and heavy fines are levied. Judging from some notable offences recently one wonders if using Bitcoin to make these bribes might have gone undetected.
In 2017: Halliburton – The company paid $29.2 million and a former vice president paid a $75,000 penalty to settle charges related to payments made to a local company in Angola in the course of winning lucrative oilfield services contracts. Cadbury Limited/Mondelez International - The global snacking business agreed to pay a $13 million penalty for FCPA violations occurring after Mondelez (then Kraft Foods Inc.) acquired Cadbury and its subsidiaries, including one in India that proceeded to make illicit payments to obtain government licenses and approvals for a chocolate factory in Baddi. JPMorgan - The firm agreed to pay $264 million to the SEC, Justice Department, and Federal Reserve to settle charges that it corruptly influenced government officials and won business in the Asia-Pacific region by giving jobs and internships to their relatives and friends.
In 2016: Embraer - The Brazilian-based aircraft manufacturer agreed to pay $205 million to settle charges that it violated the FCPA to win business in the Dominican Republic, Saudi Arabia, Mozambique, and India. GlaxoSmithKline – The UK-based pharmaceutical company agreed to pay a $20 million penalty to settle charges that it violated the FCPA when its China-based subsidiaries engaged in pay-to-prescribe schemes to increase sales. Las Vegas Sands - The casino and resort company agreed to pay $9 million to settle charges that it failed to properly authorize or document millions of dollars in payments to a consultant facilitating business activities in China and Macao.

On the 2017 Labor Day long-weekend late Sunday evening I received a message on WeChat from Philip McMaster who was at the Metaverse office in Shanghai where it was already noon Monday. Which in retrospect seems like an ideal time for a market disruption with Chinese markets open and American markets closed. He was talking about some big new crackdown on ICOs in China. The next day I started putting the picture together by reviewing my best news leads for news from within China, such as the Boxmining and Cryptoverse YouTube Channels. ICOinfo and ICOage the two biggest I CO platforms in the red hot ICO market in China today announced that they were suspending operations. The huge Bikan Summit crypto currency and blockchain event with many big name guest speakers in Beijing that was to start in one week was suddenly canceled. The price of Bitcoin moved downward five hundred dollars from the new high of $5,000 before the news. There was an explosion of FUD on the Internet. On September 4, 2017, the People’s Bank of China ordered the exchanges to give refunds because they suspected criminal activity. There are ongoing ICO sales that may be interrupted. The big NEO token sale was set to cover nearly a year and has gotten off to a great start even a few days after the news they are trading at about twenty-five dollars USD and have a total capitalization of 1.24 billion USD may now be interrupted. Much of the investment into the NEO and EOS tokens is coming from other countries than China and it remains to be seen if off-shore transactions that have no Chinese participants will be exempted.
I just checked north American Token Market and they had forty- five ICOs listed as current I was not familiar with any of them. I have been following WTT token since I went to a presentation by Giga Watt at Consensus 2017 in New York. The pitch that sounded really good to me was presented to a full- house of miners and investors by Daria Generalova Head of PR & Communications for CRYPTONOMOS. Which is a sophisticated ICO consulting firm that has promoted the WTT token for Giga Watt’s major Bitcoin mining facilities near Wenatchee, in Washington State. The successful offering had an attractive structure and was backed up by a successful crypto currency mining company managed by Dave Carlson an engineer with an excellent reputation.
The rumors and speculation that are so rampant in times like these which incidentally are rather common in crypto is partly fuel by the click-bait mentality of the crypto news channels on YouTube and Steemit. The usual pump and dump machine is being drowned out by the FUD machine now. Bitcoin is really an evolutionary algorithm. Whenever a threat is averted Bitcoin grows stronger not only in terms of it’s code but also in terms of how much faith people have in it. Bitcoin has vast network effects and leads the pack. Right now Ethereum is going through feelings that the DAO Slock-it sponsored ICO had problems and now the recent Chinese sponsored ICOs are in question. There is talk of refunds but that would be impractical because the tokens are way up in value so you would lose money asking for a refund. NEO has said that if they are informed by October 17, 2017 they will refund the tokens for the crypto paid whether it was paid for with Bitcoin or Ethereum. The company does point out though that a similar situation happened before and only fifteen people applied for the refund.
I see benefits to this situation because just like the SEC did last month in the United States the PBOC did in China. Truthfully everyone will admit that the ICO craze was well out of hand with 60 ICO trading platforms all trying to mimic the biggest ICOage and ICOinfo.
Let us deal with the bad news first. We must however keep in mind the ever present language problem in interpreting , and the best translation programs are certainly not up to a legal standard. The Peoples Bank of China says on it’s official website that “ large numbers of ICO offerings involved too much speculation, and suspected illegal financial activities in accordance with the law of the PBOC and the People’s Republic of China”. They seem to have a new term “Toll coin financing” which may involve illegal fundraising, securities issuance, financial fraud, and pyramid schemes. They say that if found suspected criminal problems will be transferred to the Judiciary and the telecommunications authorities in accordance with the law will close their websites and mobile apps.
Now for some good news. First of all and by no means a small matter, Bitcoin and Ethereum showed their resilience once again and survived. The PBOC document had several itemized points; but points three and six look somewhat promising to me. Point three wants to “Strengthen the management of token financing platform” although the text under the point ends with business license revocation after an assault on exchanges. Point six says “give full play to the role of industry organizations self-discipline” which implies a continued industry oversight group; it then goes on to suggest refunds. The good news is that it sounds like all the Chinese officials want is to protect investors at a time when many ICOs are most likely scams and pyramid schemes . The government seems to have de-coupled Bitcoin and Ethereum which are not banned from the “toll coins” which are.
Finally, after eight years both the United States of America and China have gone on the record with official crypto currency policies. My country of Canada about two years ago had Andreas Antonopoulos address a Senate committee and they wisely took his advice to wait and see how things developed and what the other countries did. Australia had him talk to them too but they did not heed his advice and they have been trying to come up with regulations.
I have been trying to study the legal aspects of what is going on. I find the MIT media lab from the Massachusetts Institute of Technology has the best legal advice that I can find on YouTube. Harvard posted a symposium on YouTube where some lawyers made the case that Bitcoin was a commodity and claimed that there was a long-standing body of law concerning the co-mingling of goods that would kill bitcoin. It seemed to me that many of them did not really get Bitcoin.
There are other legal considerations that are being discussed on the Internet about the crypto currency space. It is said that given the global nature of the business one could potentially be vulnerable to the worst laws on earth or sued in the worst court system. Companies should have the customers agree when they sign the contract that private arbitrators in Germany, England, or wherever will provide the method of dispute resolution. The contract should also state that it is being drafted under the laws of Germany or Britain or wherever the company feels they would get a fair shake. The contract should state that any lawsuits must take place in that country. This is no guarantee that you will not be sued in an unfavorable jurisdiction but using the preceding ideas might be very beneficial if you were.
Forbes magazine has an annual listing of billionaires. The most recent listing has eighteen-hundred and twenty-six people who have amassed fortunes of more than one-billion dollars. Three-hundred and twenty-five people have acquired more than five-billion dollars. Sir Richard Branson, who incidentally has been rumored to like bitcoin went over the five-billion mark this listing ; and is now in three-hundred and twenty-forth place. Positions on the list change quite dramatically each year, with some billionaires being over-taken in the rankings by other billionaires who had better ideas, or better luck.
I think that the first person to make a billion dollars from crypto currency and a blockchain may well be Lu Guanqiu who is already a billionaire from his Wanxiang automotive conglomerate. Lu Guanqiu is from Hangzhou, in Zhejiang province, which is located a little south of Shanghai. He is reported to have a fortune of 6.6 billion dollars. Forbes Chinese billionaires list reports on three-hundred and seventy-one billionaires, and places Lu Guanqiu in the twenty-first position. I think that being seventy-two years of age gives him plenty of time to see his bold moves into blockchain ventures move him up to near the top of the list with number one Wang Jianlin at 33 billion and Jack Ma in second place at 28 billion. Wanxiang Blockchain Labs sponsored Bitshares stock trading platform, and then started funding blockchain start-ups through Fenbushi venture capital, which operates out of the twenty-first floor of the Wanxiang office tower in Shanghai. Bo Shen the project manager of Bitshares had to redesign the platform when it was discovered that a rather small six- million dollar cash investment in tokens could buy control of the Bitshares platform in a hostile takeover attempt.
The biggest blockchain enterprise on earth is being managed by Dr. Feng Xiao, who is billed as ‘The most Important Man in Blockchain’. Dr. Feng Xiao has huge financial commitments from Wanxiang and the Chinese government. Wanxiang Blockchain Labs worked in collaboration with the People’s Bank of China on RMB coin referred to often as ‘China-coin’. Dr. Feng Xiao has been tasked with developing an entire city as a pilot project on nine square kilometers of land in Hangzhou.
He has seven years and 200 billion dollars in cash to build ‘New Energy City’ which will focus on technological innovation and has permits for automobile and truck manufacturing. The Chinese government has said that no more gasoline or diesel vehicles will be manufactured in China. Britain and France have already set a date of 2040, by when manufacturing of gasoline and diesel cars and trucks will be banned. While China has not announced a definite date, there is room for a lot of technological innovation at New Energy City. Dr. Feng Xiao wants blockchain technology to be used for all purchases and acquisitions of building materials and equipment used in the mega-project. Smart contracts will be written on the Ethereum blockchain to hire and keep track of up to ninety-thousand workers and the two-hundred billion dollars in expenses. The good doctor seems like an obvious candidate for the first Blockchain Billionaire.