T’my coin – a great idea from Russian history

(Bloc10.com 3/4/2018) — During the period of Russian History known as the “Mongol Invasion” foreign Khans (rulers) imposed taxes based on a financial system calculated by male conscripts to the army.  The mongols imposed a military system of economy where everything was looked at from the perspective of the military.  When a town’s taxes were calculated, they cared not about money but how many able men could serve in the Khan’s army.  Although merchants still paid taxes in the form of money (similar to our ‘sales tax’) towns, provinces, and other municipalities such as the grand duchy of Nizhni Novgorod paid their taxes in soldiers, roughly 5% of the total population.

With new Cryptocurrencies lacking novel ideas for backing, one only needs to look at Medieval European history for many practical examples.  Why should all Cryptos be tied to the electronic world?  In fact the opposite needs to happen, if Crypto is going to move beyond the high tech crowd.  New Cryptos need to have real world purposes, serve multiple economic use-cases, that fit aptly like a puzzle piece into the existing model.  The idea of Cryptocurrency is security and efficiency, not to reinvent the underlying business model.  Ultimately, the financial services sector should be like a utility that allows the real sectors to grow and innovate.  What has happened in the last 50 years has been the opposite, Wall St. has become an industry by itself, charging fees and taxing real industry and stifling growth.

At Bloc10 we are innovators and developers, not principals.  We want to develop your Blockchain project as a vendor and allow you to grow your business naturally (organically).  Ideally, you won’t even notice that we exist!  It’s your project.  Grow your business, and Get Bloc.

Photo taken from George Vernadsky’s “A History of Russia”

Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings

January 18, 2018

Paul Schott Stevens
President & CEO
Investment Company Institute
1401 H St., NW, Suite 1200
Washington, DC 20005

Timothy W. Cameron
Asset Management Group – Head
Securities Industry and Financial Markets Association
1101 New York Avenue, NW, 8th Floor
Washington, DC 20005

Re: Engaging on Fund Innovation and Cryptocurrency-related Holdings

Dear [Mr. Stevens/Mr. Cameron]:

As you know, the U.S. investment fund market is one of the most robust, varied and successful markets for investment products in the world. Its success can be attributed, in significant part, to the commitment of fund sponsors to responsible innovation and continuous improvement of the products they offer. This commitment is especially important because many of America’s Main Street investors rely on registered funds to help them build toward education, retirement and other important goals.

Flexibility to innovate is also a key feature of the Investment Company Act of 1940. As the Division with primary responsibility for regulatory policy regarding registered funds, we seek to foster innovation that benefits investors and preserves the important protections that Congress established in the 1940 Act. Over the years, dialogue between fund sponsors and the Division has facilitated the development of many new types of investment products that have expanded choice for investors. Exchange-traded funds and money market funds are notable examples.

Recently, the growth in cryptocurrencies and cryptocurrency-related products has attracted significant attention, and we have seen interest among sponsors in offering registered funds that would hold these new digital products. As we have in the past, the Division stands ready to engage in dialogue with sponsors regarding the potential development of these funds. We believe, however, that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors.

We appreciate that proponents of cryptocurrencies and related products have identified a range of potential benefits. We are also aware that critics of cryptocurrencies have raised various concerns regarding transparency of information, trading, valuation and other matters related to the nature of the underlying assets. In addition, the innovative nature of cryptocurrencies and related products, as well as their expected use and utility in our financial markets, means that they are, in many ways, unlike the types of investments that registered funds currently hold in substantial amounts. In light of these considerations, we have, at this time, significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the 1940 Act and its rules. To facilitate the start of our dialogue, we have identified below a number of these questions, and we invite you and any interested sponsors to engage with us in detail on these. While we have identified the questions below, we note that the cryptocurrency markets are developing swiftly. Additional questions may arise from these developments.[1]

Valuation

Mutual funds and ETFs must value their assets on each business day in order to strike a net asset value (“NAV”). Appropriate valuation is important because, among other things, it determines fund performance, what investors pay for mutual funds and what authorized participants pay for ETFs (and what they receive when they redeem or sell). Would funds have the information necessary to adequately value cryptocurrencies or cryptocurrency-related products, given their volatility, the fragmentation and general lack of regulation of underlying cryptocurrency markets, and the nascent state and current trading volume in the cryptocurrency futures markets?

How would funds develop and implement policies and procedures to value, and in many cases “fair value,” cryptocurrency-related products?

How would funds’ accounting and valuation policies address the information related to significant events relevant to cryptocurrencies? For example, how would they address when the blockchain for a cryptocurrency diverges into different paths (i.e., a “fork”), which could result in different cryptocurrencies with potentially different prices? How and when would funds recognize such information in their NAV?

What policies would a fund implement to identify, and determine eligibility and acceptability for, newly created cryptocurrencies offered by promoters (e.g., an “air drop”)? How might a fund account for those holdings if the fund chooses to claim such cryptocurrencies?

How would differences among various types of cryptocurrencies impact funds’ valuation and accounting policies?

How would funds consider the impact of market information and any potential manipulation in the underlying cryptocurrency markets on the determination of the settlement price of cryptocurrency futures?[2]

Liquidity

A key feature of open-end funds, such as mutual funds and ETFs, is daily redeemability. Funds must maintain sufficiently liquid assets in order to provide daily redemptions. Under the new fund liquidity rule, rule 22e-4, funds will be required to implement a liquidity risk management program.[3] Under the rule, among other things, funds must classify their investments into one of four liquidity categories and limit their investments in illiquid securities to 15% of the fund’s assets.[4] A fund’s liquidity classifications should be informed by the market depth of its holdings (that is, whether trading varying portions of a position in a particular portfolio asset is reasonably expected to affect the liquidity characteristics of that investment) as well as other relevant market, trading and investment-specific considerations.

What steps would funds investing in cryptocurrencies or cryptocurrency-related products take to assure that they would have sufficiently liquid assets to meet redemptions daily?

How would funds classify the liquidity of cryptocurrency and cryptocurrency-related products for purposes of the new fund liquidity rule, rule 22e-4? For example, would any of these products be classified as other than illiquid under the rule? If so, why? How would funds take into account the trading history, price volatility and trading volume of cryptocurrency futures contracts, and would funds be able to conduct a meaningful market depth analysis in light of these factors? Similarly, given the fragmentation and volatility in the cryptocurrency markets, would funds need to assume an unusually sizable potential daily redemption amount in light of the potential for steep market declines in the value of underlying assets?

How would a fund prepare for the possibility that funds investing in cryptocurrency-related futures could grow to represent a substantial portion of the cryptocurrency-related futures markets? How would such a development impact the fund’s portfolio management and liquidity analysis?

Custody

The 1940 Act imposes safeguards to ensure that registered funds maintain custody of their holdings. These safeguards include standards regarding who may act as a custodian and when funds must verify their holdings. To the extent a fund plans to hold cryptocurrency directly, how would it satisfy the custody requirements of the 1940 Act and relevant rules? We note, for example, that we are not aware of a custodian currently providing fund custodial services for cryptocurrencies. In addition, how would a fund intend to validate existence, exclusive ownership and software functionality of private cryptocurrency keys and other ownership records? To what extent would cybersecurity threats or the potential for hacks on digital wallets impact the safekeeping of fund assets under the 1940 Act?

While the currently available bitcoin futures contracts are cash settled, we understand that other derivatives related to cryptocurrencies may provide for physical settlement, and physically settled cryptocurrency futures contracts may be developed. To the extent a fund plans to hold cryptocurrency-related derivatives that are physically settled, under what circumstances could the fund have to hold cryptocurrency directly? If the fund may take delivery of cryptocurrencies in settlement, what plans would it have in place to provide for the custody of the cryptocurrency?

Arbitrage (for ETFs)

ETFs obtain Commission orders that enable them to operate in a specialized structure that provides for both exchange trading of their shares throughout the day at market-based prices, and “creation unit” purchases and redemptions transacted at NAV by authorized participants. In order to promote fair treatment of investors, an ETF is required to have a market price that would not deviate materially from the ETF’s NAV. In light of the fragmentation, volatility and trading volume of the cryptocurrency marketplace, how would ETFs comply with this term of their orders?

Have funds engaged with market makers and authorized participants to understand the feasibility of the arbitrage for ETFs investing substantially in cryptocurrency and cryptocurrency-related products? How would volatility-based trading halts on a cryptocurrency futures market impact this arbitrage mechanism? How would the shutdown of a cryptocurrency exchange affect the market price or arbitrage mechanism?[5]

Potential Manipulation and Other Risks

In a recently issued statement, Chairman Jay Clayton noted that concerns have been raised that cryptocurrency markets, as they are currently operating, feature substantially less investor protection than traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.[6] The Commission has also discussed concerns relating to the risk of fraud and manipulation in cryptocurrency markets in orders denying exchange proposals to list the shares of commodity trusts that would hold cryptocurrency.[7] In addition, a number of recent media reports have highlighted a range of possible vectors for potential manipulation of cryptocurrency markets. Although some funds may propose to hold cryptocurrency-related products, rather than cryptocurrencies, the pricing, volatility and resiliency of these derivative markets generally would be expected to be strongly influenced by the underlying markets.

How have these concerns informed your responses to the foregoing questions concerning, for instance, valuation and liquidity?

How would you weigh these concerns in considering whether offering a proposed fund is appropriate for the wide range of investors, including retail investors, who might invest in the fund? Would investors, including retail investors, have sufficient information to consider any cryptocurrency-related funds and to understand the risks?

Have you discussed with any broker-dealers who may distribute the funds how they would analyze the suitability of offering the funds to retail investors in light of the risks discussed above? Are there particular challenges investment advisers would face in meeting their fiduciary obligations when investing in cryptocurrency-related funds on behalf of retail investors?

* * *

The resolution of many of the questions we have raised in the context of a product seeking to register under the 1940 Act will also be important to the ongoing analysis of filings for exchange-traded products and related changes to exchange listing standards by the Division of Corporation Finance, the Division of Trading and Markets and the Office of the Chief Accountant. In addition, questions concerning what regulatory structure or structures apply to the market for the underlying instrument will be relevant to the requirements of both the 1940 Act and the Securities Exchange Act of 1934, including applicable accounting, audit and reporting implications. We have been and will continue working closely with the other Divisions and Offices as we analyze these significant issues.

The preceding questions have focused on specific requirements of the 1940 Act and its implications for registered offerings of funds intending to hold cryptocurrency or related products. There may be registered offerings under the Securities Act of 1933 by entities holding similar products and pursuing similar investment strategies. Those entities would have to comply with the registration and prospectus disclosure requirements of the Securities Act.

Until the questions identified above can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products, and we have asked sponsors that have registration statements filed for such products to withdraw them. In addition, we do not believe that such funds should utilize rule 485(a) under the Securities Act, which allows post-effective amendments to previously effective registration statements for registration of a new series to go effective automatically. If a sponsor were to file a post-effective amendment under rule 485(a) to register a fund that invests substantially in cryptocurrency or related products, we would view that action unfavorably and would consider actions necessary or appropriate to protect Main Street investors, including recommending a stop order to the Commission.

I appreciate your assistance in sharing our views on this subject with your members. We look forward to engaging with you and your members on these important questions, and we invite you to contact Barry Miller at (202) 551-6725.

Sincerely,

Dalia Blass
Director
Division of Investment Management
U.S. Securities and Exchange Commission

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[1] This letter addresses issues arising from funds potentially focused on cryptocurrency-related products. We note, however, that other types of digital assets and related products could present similar issues.

[2] See, e.g., http://www.businessinsider.com/ico-cryptocurrency-pump-and-dump-telegram-2017-11; http://fortune.com/2017/12/10/bitcoin-whales-market-manipulation/.

[3] See Investment Company Liquidity Risk Management Programs, Inv. Co. Act Rel. No. 32315 (Oct. 13, 2016), available at https://www.sec.gov/rules/final/2016/33-10233.pdf.

[4] The 15% illiquidity standard is consistent with past Commission statements regarding funds’ liquidity standards. However, the Commission’s new rule strengthened the compliance controls under the standard, including requiring reporting to a fund’s board and to the Commission regarding breaches of the 15% illiquid limit. Most funds would be required to comply with the new rule’s liquidity risk management program requirements on Dec. 1, 2018, while fund complexes with less than a $1 billion in net assets would be required to do so on June 1, 2019.

[5] See, e.g., https://www.bloomberg.com/news/articles/2018-01-12/crypto-exchange-kraken-goes-dark-and-user-anxiety-surges.

[6] SEC Chairman Jay Clayton, Statement on Cryptocurrencies and Initial Coin Offerings (Dec. 11, 2017), available at https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11.

[7] See, e.g., Securities and Exchange Commission, Order Disapproving a Proposed Rule Change (Mar. 28, 2017), available at https://www.sec.gov/rules/sro/nysearca/2017/34-80319.pdf.

http://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm

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https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm 

These Are The 6 Traders Who Were Just Arrested For Manipulating The Gold Market

On Monday morning we reported that a number of traders - currently or formerly employed by UBS, HSBC and Deutsche Bank (as usual, no JPMorgan US banks were touched) - would be perp-walked and charged in an unprecedented cross-agency crackdown between the CFTC, DOJ and FBI seeking to punish spoofers of futures. This was confirmed moments ago by a CFTC press release which announced criminal and civil enforcement actions against three banks and six individuals involved in commodities fraud and spoofing schemes.

Here is what got far less publicity: it wasn't just any futures that were spoofed - all the banks and traders busted were charged for spoofing the precious metals market, i.e. gold and silver. We bring this up because there are still the occasional idiots out there who say gold and silver were never manipulated.

The banks in question, and their penalties:

Deutsche Bank will pay a $30 million civil monetary penalty and undertake remedial relief. The Orders finds that "from at least February 2008 and continuing through at least September 2014, DB AG, by and through certain precious metals traders (Traders), engaged in a scheme to manipulate the price of precious metals futures contracts by utilizing a variety of manual spoofing techniques with respect to precious metals futures contracts traded on the Commodity Exchange, Inc. (COMEX), and by trading in a manner to trigger customer stop-loss orders."

UBS will pay a $15 million civil monetary penalty and undertake remedial relief.  The Order finds that from "January 2008 through at least December 2013, UBS, by and through the acts of certain precious metals traders on the spot desk (Traders), attempted to manipulate the price of precious metals futures contracts by utilizing a variety of manual spoofing techniques with respect to precious metals futures contracts traded on the Commodity Exchange, Inc. (COMEX), including gold and silver, and by trading in a manner to trigger customer stop-loss orders."

HSBC will pay a civil monetary penalty of $1.6 million, and cease and desist from violating the Commodity Exchange Act’s prohibition against spoofing, after an Order found HSBC engaged in numerous acts of "spoofing with respect to certain futures products in gold and other precious metals traded on the Commodity Exchange, Inc. (COMEX). The Order finds that HSBC engaged in this activity through one of its traders based in HSBC’s New York office."

For those keeping count, this is roughly the 4th time HSBC has been found guilty of manipulating markets after the bank nearly lost its charter and swore it would never manipulate markets again.

* * *

And here are the 6 traders who spoof and otherwise manipulated the precious metals market:

• Krishna Mohan

The CFTC today announced the filing of a federal court enforcement action in the U.S. District Court for the Southern District of Texas against Krishna Mohan of New York City, New York, charging him with spoofing (bidding or offering with the intent to cancel before execution) and engaging in a manipulative and deceptive scheme in the E-mini Dow ($5) futures contract market on the Chicago Board of Trade and the E-mini NASDAQ 100 futures contract market on the Chicago Mercantile Exchange.

• Jiongsheng Zhao

The CFTC today announced the filing of a federal court enforcement action in the U.S. District Court for the Northern District of Illinois against Defendant Jiongsheng Zhao, of Australia, charging him with spoofing and engaging in a manipulative and deceptive scheme in the E-mini S&P 500 futures contract market on the Chicago Mercantile Exchange (CME).

• James Vorley & Cedric Chanu

The CFTC announced the filing of a civil enforcement action in the U.S. District Court for the Northern District of Illinois against James Vorley, a U.K. resident, and Cedric Chanu, a United Arab Emirates resident, charging them with spoofing and engaging in a manipulative and deceptive scheme in the precious metals futures markets.

• Jitesh Thakkar & Edge Financial Technologies

The CFTC today announced the filing of a federal court enforcement action in the U.S. District Court for the Northern District of Illinois, charging Jitesh Thakkar of Naperville, Illinois, and his company, Edge Financial Technologies, Inc. (Edge), with aiding and abetting spoofing and a manipulative and deceptive scheme in the E-mini S&P futures contract market on the Chicago Mercantile Exchange (E-mini S&P).

An amusing tangent: recall that according to court docs related to the prosecution of "May 2010" flash crash scapegoat Navinder Sarao, the former S&P spoofer allegedly asked the abovementioned founder of the trading-software company Edge Financial Technologies Inc. to modify a program to allow him to automate some trading functions.

The CFTC and Department of Justice said in their complaint that those modifications were designed to help him spoof the markets more efficiently.

It gets better: as the WSJ reported, the now arrested Jitesh Thakkar, the founder of Edge Financial and a former member of a CFTC technology-advisory committee, said in an interview that the CFTC had sent [Sarao] a letter asking him to retain all documents related to Mr. Sarao.

“I’ve spoken out against spoofing,” he said. “We didn’t create anything that does anything illegal.”

Two years later Thakkar was arrested for just that, but it also now appears that Thakkar may have used Sarao's algo himself.

* * *

Finally, our old friend, Andre Flotron, formerly of UBS, who as we reported on several prior occasions was arrested and charged with gold-rigging after a lengthy career of doing just that at the largest Swiss bank:

The CFTC announced the filing of a civil enforcement action in the U.S. District Court for the District of Connecticut against Andre Flotron, of Switzerland, charging him with engaging in a manipulative and deceptive scheme and spoofing in the precious metals futures markets on a registered entity.

* * *

Meanwhile, the S&P500 manipulation by the Fed and spoofing by HFTs continues apace, and will as long as the market keeps levitating because it is only when stocks crash, that the fingerpointing begins.

tZERO ICO About To Make Overstock A Wall Street Favorite

Summary

tZero ICO is about to disrupt markets.

KODAKCoin perhaps the first large company launching a Crypto.

KODAKCoin will trade exclusively on tZERO's platform.

KODAKCoin itself is not important, what is important is this is the precedent for hundreds of other big corporate coins.

It's amazing how many rumors and trash talk can keep a genie in a bottle. But in the next 60 days, not Trump himself could stop this genie from coming out of Overstock.com's (NASDAQ:OSTK) bottle and when it does, it will make Crypto history. There's nothing new here, this story has been going on for some time - but we're now nearing the climax, the singularity. And it's happening now!

Recently, we authored an article talking about how Overstock is the perfect Blockchain play and we still believe it is.

But since our article things have changed for the better, and we want to focus on the tZERO ICO.

Read the full story at: https://seekingalpha.com/article/4140678-tzero-ico-make-overstock-wall-street-favorite

Overstock: The Perfect Stock Blockchain Play

Summary

TZero has been working on this technology for years - it is launching, not developing.

Few legitimate options for stocks that are deep into Blockchain technology.

Alternatives such as IBM are not as pure Blockchain plays as OSTK.

For those of you who are 'now' looking at Blockchain, see this article on Seeking Alpha we authored in March of 2016 urging investors to go long Overstock.com (OSTK) which we did, and profited nicely. Like the whole move with Bitcoin, it would have taken patience to sit and hold through the process, now almost 2 years. Things take time to build, develop, and grow. Now we're on the precipice of what we believe is the 'real' bull run for crypto, that being the regulated run. Until now, there hasn't been really a way to buy or invest in cryptocurrencies or businesses in a regulated way. Now there're futures on regulated exchanges, and the TZero ICO.

Read the full article here: https://seekingalpha.com/article/4134692-overstock-perfect-stock-blockchain-play