Laws and Regulations

SEC Fund Innovation Report (PDF)

Senate Banking Committee Hearing on Virtual Currencies (PDF)

How OFAC's Guidance May Negatively Impact Token Fungibility (PDF)

Origin Stories: The Term "Utility Token" (PDF)

Bitcoin, at its heart, is a technology and the U.S. government generally does not regulate technologies themselves, but rather, how technologies are used. For example, PayPal is regulated as a money service business because it enables the sending of money over the Internet, but the Internet itself is not regulated as such. Not surprisingly, the U.S. Congress and many U.S. federal and state agencies, including the SEC and the CFTC, have begun examining the operations of digital asset issuers, their Users and the market for digital assets, and have claimed authority to govern various aspects of the digital assets ecosystem. 

It is not always easy to determine which agency has governing authority. For example, a CFTC commissioner recently said that digital assets “may actually transform at some point from something that starts off as a security and transforms into a commodity.” The CFTC determined in 2015 that bitcoin is a commodity and that fraud and manipulation involving bitcoin is within the purview of the agency. However, financial products linked to the value of digital assets, including bitcoin, may be structured as securities and subject to U.S. securities laws. In addition to complying with federal laws, bitcoin-related companies must also comply with state regulations, some of which are tailored specifically to digital asset activity, such as the “BitLicense”, which was created by the New York State Department of Financial Institutions in 2015. Still, because Bitcoin is a global network, the laws and regulations from jurisdictions around the world are applicable and how countries approach digital assets range from clear regulatory guidance and approval to outright bans on digital asset ownership.

Raiden (RDN)

RDN Token Profile (PDF)

Polymath is a project that aims to create platform for the exchange of security tokens while being legally compliant. POLY, the platform’s native token, is based on Ethereum as an ERC20 token and serves as a gateway to the services offered by the Polymath exchange. The token attempts to enable individuals and institutions to authenticate their identity and provides a bidding mechanism for the issuances hosted on the platform. Issuers can also use POLY to hire smart-contract developers through the platform to work on key aspects of their tokens’ smart contracts. According to the project’s website, the Polymath team is working on a securities token standard called ST20; which seems to be specifically designed for ERC20 tokens. POLY will also be used to pay for fees, including for KYC accreditation, which will be required in order for an investor to get whitelisted for future offerings. The platform also aims to employ governance features through a staking mechanism also based on POLY, and implemented through a number of smart contracts. Most of the development of these smart contracts has been outsourced to SecureBlocks; a Dehli-based Solidity development shop. Partnerships with the Barbados Stock Exchange (BSE) and tZero have been announced to enable the trading of security tokens. It appears that the partnership with the BSE will relate to at least one security token, the Polymath Capital Fund, but it is unclear to us whether all security tokens associated with Polymath will go through the BSE, tZero, or another regulated securities exchange or ATS platform. It is also possible that these regulatory responsibilities could be passed on to the Legal Delegates described in the whitepaper.

Polymath (POLY)

Poly Token Profile (PDF)

Polymath is a project that aims to create platform for the exchange of security tokens while being legally compliant. POLY, the platform’s native token, is based on Ethereum as an ERC20 token and serves as a gateway to the services offered by the Polymath exchange. The token attempts to enable individuals and institutions to authenticate their identity and provides a bidding mechanism for the issuances hosted on the platform. Issuers can also use POLY to hire smart-contract developers through the platform to work on key aspects of their tokens’ smart contracts. According to the project’s website, the Polymath team is working on a securities token standard called ST20; which seems to be specifically designed for ERC20 tokens. POLY will also be used to pay for fees, including for KYC accreditation, which will be required in order for an investor to get whitelisted for future offerings. The platform also aims to employ governance features through a staking mechanism also based on POLY, and implemented through a number of smart contracts. Most of the development of these smart contracts has been outsourced to SecureBlocks; a Dehli-based Solidity development shop. Partnerships with the Barbados Stock Exchange (BSE) and tZero have been announced to enable the trading of security tokens. It appears that the partnership with the BSE will relate to at least one security token, the Polymath Capital Fund, but it is unclear to us whether all security tokens associated with Polymath will go through the BSE, tZero, or another regulated securities exchange or ATS platform. It is also possible that these regulatory responsibilities could be passed on to the Legal Delegates described in the whitepaper.

Kin (KIN)

Kin Token Profile (PDF)

Kik Interactive Inc. (Kik) is one of the first mainstream companies to launch a token sale. It hopes to leverage its existing 15M monthly active users to create an ecosystem that aligns the interests of Kik, its developer community, and its mobile app users, using the Kin token. The company claims that developers will be incentivized to create new and unique services and consumers can earn and spend Kin in the Kik app.  Kik and the Kin Foundation received 90% of the total supply of tokens, so they too are incentivized to grow the Kin ecosystem. The ICO lacked key disclosure in important areas (e.g. technical details) and the project made statements about the token’s valuation that did not take into account key details. Since the ICO, KIN announced that it would launch on the Ethereum blockchain but then announced it would launch on the Stellar blockchain. It is unclear at this point whether KIN will launch on both or only Stellar.

Verge (XVG)

Verge Token Profile (PDF)

Verge is a privacy preserving cryptocurrency based on the Bitcoin protocol that attempts to obfuscate not only the transactions within its blockchain, but also the communication between the many nodes in the network. The Verge protocol is integrated with a Tor onion routing system to encrypt the data exchanged across a network of nodes. Verge nodes are organized to facilitate integration with I2P, yet another network obfuscation mechanism that creates a shielded intranet of nodes. Combined, these two features are intended to provide a strong combination of both packet-based and circuit-based routing. Like Dash, Verge employs multi-algorithmic mining and five different Proof-of-Work hashing algorithms can be used to mine a Verge block. Like Bitcoin, Verge did not have an ICO and it was initially launched through mining. The project now seems to be working on several layer-two features to enhance the value of its platform, such as smart contract integration through Rootstock and atomic swaps. Shortly after Verge was accused of paying John McAfee to make it his Coin of the Day, the project announced that it would release the Wraith Protocol before the end of the month. This was outlined in a critical article about the project that was published by CryptoSlate on April 15, 2018. It also included evidence that 18.6M XVG had been moved from the project’s fundraising wallet.

DAR Educational Resources

To access our in-depth educational guide, please click here.

 

INTRODUCTION

Many people do not understand what cryptocurrencies are, but after reading this overview, we hope that you will understand one cryptocurrency, Bitcoin. Before we begin, we need to make a distinction between “Bitcoin” (upper-case B) and “bitcoin” (lower-case b). “Bitcoin” (upper-case B) is the software that runs the Bitcoin network. “bitcoin” (lower-case b) is the native token or “cryptocurrency” that is used to transact in the network. We have broken up this overview into five sections: (1) the participants in the Bitcoin network, (2) the underlying technology, (3) how users transact, (4) network security, and (5) regulatory environment.

 

BITCOIN NETWORK PARTICIPANTS

  • Users: Users are the parties who transact with one another on the Bitcoin network. Users do not hold bitcoin physically; rather, they control the right to move specific amounts of bitcoin across the network.  Users safeguard this control in “wallets”, which can be stored on a personal computer, a piece of paper, a specially designed piece of hardware, or through a third-party service provider, such as Exchanges.
  • Exchanges: Most people purchase bitcoin from Exchanges. Exchanges can either sell bitcoin directly to Users, or create a marketplace where Users can transact amongst themselves. They can also store bitcoin for Users or help initiate transactions to other parties on the Bitcoin network. A parallel might be an online bank account where one can purchase financial products, in addition to wiring money.
  • Miners: Mining is the process by which transactions are verified and confirmed on the Bitcoin network. Miners, which are specialized computers, race to solve a computationally intensive mathematical problem. Solving this math problem verifies and confirms that the proposed Bitcoin transactions are legitimate and that no one is sending bitcoin that they do not own. The first Miner to win the race is awarded with newly created bitcoin, as well as transaction fees from senders who want their transactions processed more quickly. Around the year 2140, new bitcoin will cease to be created and Miners will only be rewarded with transaction fees.

 

TECHNOLOGY

Bitcoin solved a problem in computer science originating in 1982, called “The Byzantine General’s Problem”. The question was how to establish trust and reach agreement among parties who do not necessarily know or trust one another. To solve this problem, Bitcoin employed a combination of cryptography and economic incentives. The cryptography ensures, among other things, that people only spend bitcoin that they own, and the economic incentives make it more profitable for Miners to act honestly rather than nefariously.

The blockchain is a continually growing database of all past transactions. Each “block” is a collection of transactions that are validated at the same time, and the “chain” is the chronological sequence of blocks containing all past transactions. A new block is created approximately every ten minutes by Miners, who are awarded with new bitcoin, currently 12.5 BTC, as well as any transaction fees.

Bitcoin uses several cryptographic functions, but for purposes of this overview, it is only important that you understand Private Keys, Public Keys, Addresses, and Wallets.

  • Private Keys are strings of random numbers and letters, chosen at random by the Bitcoin software that can be used to spend the bitcoin associated with a specific Address. A parallel might be the PIN number of a checking account; and thus, Private Keys should not be shared.
  • Public Keys are derived from their associated Private Key, but can be publicly shared. Addresses are derived from Public Keys.
  • Addresses often represent Users’ public identities, like a bank account number. This is where you send or receive bitcoin and both the sender’s and receiver’s Address are included in the transaction data stored on the Bitcoin blockchain.
  • Wallets are a collection of Users’ Private Keys and Public Keys that give Users the right to move the associated bitcoin. Wallets do not physically contain any bitcoin.

 

BITCOIN TRANSACTIONS

Transactions are like the double entry accounting system that dates back hundreds of years. Each transaction contains inputs, or debits against a sender’s account, and outputs, or credits to a receiver’s account. Balances are the sum of all debits associated with their private keys, minus all credits.

To initiate a transaction, you only need to know the Address of the person to whom you want to send bitcoin. You, or the Exchange on your behalf, will “sign” the transaction with your Private Key, thereby authorizing the transfer of bitcoin. Once the transaction is initiated, the Bitcoin software will look at all previous unspent outputs (debits) related to your Public Key to make sure you hold at least as much bitcoin as you want to send. Because a new block is only created every ten minutes, the transaction is not completed immediately, but is instead added to a list of unprocessed and unverified transactions called the Memory Pool or “Mempool”.

Miners participate in a competition to create new blocks that contain transactions from the Mempool. Because blocks have a fixed size, all pending transactions in the Mempool do not necessarily fit in one block, and Miners prioritize transactions with higher fees. Transaction fees are specified by the sender of bitcoin, so if timeliness is important, the sender may consider paying higher fees.

The competition is a race among the Miners to find the solution to a mathematical puzzle that confirms the validity of a Bitcoin transaction. This competition requires Miners to contribute significant amounts of computer processing power to the network, making the puzzle difficult to solve. Although difficult to solve, it is very easy to verify that the solution is legitimate. After solving the puzzle, the winning Miner notifies the other Miners in the network of its solution, and the other Miners then verify that the solution is indeed legitimate. Once verified, the new block is cryptographically linked to the chain of previous blocks. Miners then begin solving the puzzle for new transactions that have accumulated in the Mempool.

 

NETWORK SECURITY

If you have heard about Bitcoin, you have also probably heard about hacks, thefts, and lost hard drives containing access to large amounts of bitcoin. The software running the Bitcoin network is extremely secure, built on decades of cryptographic research, and has an economic incentive structure making it is more profitable to protect the integrity of the blockchain than to attack it. However, Bitcoin is still in its infancy and should be considered an experimental technology. Although rare, other cryptocurrencies have had critical errors in their codebases.

Most cryptocurrency-related security incidents resulting in theft or loss of funds have been due to user-error or issues with third party service providers. Because Bitcoin is an open source, decentralized network, there is no central authority to reset passwords or recover lost funds if something goes wrong. The security of private keys, and therefore access to funds, is the sole responsibility of Users. Private keys can be stored locally on a computer, paper wallet, or hardware security module, such as a Ledger Nano S. They can also be entrusted to third parties, such as Exchanges and online wallet providers. When using any online service, we encourage best practices with regards to internet security, such as the use of strong, unique passwords and two factor authentication services, such as Google Authenticator. Exchanges and online wallet providers have been hacked in the past, which exposed Users to loss of funds, even when they followed best security practices. Therefore, we encourage the use of only vetted, reputable third party service providers to mitigate counterparty risk.

 

REGULATORY ENVIRONMENT

Bitcoin, at its heart, is a technology and the U.S. government generally does not regulate technologies themselves, but rather, how technologies are used. For example, PayPal is regulated as a money service business because it enables the sending of money over the Internet, but the Internet itself is not regulated as such. Not surprisingly, the U.S. Congress and many U.S. federal and state agencies, including the SEC and the CFTC, have begun examining the operations of digital asset issuers, their Users and the market for digital assets, and have claimed authority to govern various aspects of the digital assets ecosystem. 

It is not always easy to determine which agency has governing authority. For example, a CFTC commissioner recently said that digital assets “may actually transform at some point from something that starts off as a security and transforms into a commodity.” The CFTC determined in 2015 that bitcoin is a commodity and that fraud and manipulation involving bitcoin is within the purview of the agency. However, financial products linked to the value of digital assets, including bitcoin, may be structured as securities and subject to U.S. securities laws. In addition to complying with federal laws, bitcoin-related companies must also comply with state regulations, some of which are tailored specifically to digital asset activity, such as the “BitLicense”, which was created by the New York State Department of Financial Institutions in 2015. Still, because Bitcoin is a global network, the laws and regulations from jurisdictions around the world are applicable and how countries approach digital assets range from clear regulatory guidance and approval to outright bans on digital asset ownership.

Stellar (XLM) Token Report

XLM In-Depth Report (PDF)

XLM Model (XLS)

Stellar Lumens is a payments rail that is specifically designed for remittances, micropayments, and low cost financial services. The protocol employs a novel consensus mechanism called the Stellar Consensus Protocol (SCP), which provides low latency for transactions regardless of the amount being transacted. SCP also allows trust ratings to be assigned to the nodes that validate transactions, thereby making validation power proportionate to a quantitative metric representing trust. This protocol design also allows for low network fees, thereby enabling low cost microtransactions. Many partnerships have been created to build services on the Stellar network. For example, Deloitte, in June 2016, announced a partnership with Stellar to build a cross-border micropayments app. In November 2017, a partnership with IBM was announced to move money across borders throughout the South Pacific.
 

FirstBlood (1ST)

Firstblood Token Profile (PDF)

FirstBlood is a decentralized eSports protocol based on Ethereum that allows users to compete against each other in popular online games (e.g. DOTA2) for rewards. FirstBlood utilizes an Ethereum smart contract that acts as escrow for tournament funds. It uses oracle-like entities called Witnesses to process game results and initiate transfers. Its native 1ST token allows users to play matches, become a Witness for games, vote on juries, host tournaments, and claim rewards from referrals. Many different types of tournaments can be created using the FirstBlood platform and the project appears to have created a set schedule for its tournaments. 

BitConnect (BCC)

BitConnect Token Profile (PDF)

BitConnect characterized itself as a digital exchange, lending platform and community-driven investment fund that “provide[d] risk-free returns to its users.” The website claimed to have a “Volatility Software” trading bot that guaranteed users up to a 40% return per month in addition to returns from lending operations. The principal of every investment is guaranteed, but the there is a lock-up period of, on average, 220 days. As of this date, there is no information available on the actual methodology behind their trading bots, the team itself or the lending activities of the project. There are no testimonials from users that borrowed money using the platform and the loan application is inaccessible. Although BitConnect is listed as a Large Cap according to WorldCoinIndex, 90% of the volume and price data is self-reported using data from BitConnect’s proprietary exchange.  On January 4, 2018, the Texas Securities Commissioner entered an emergency cease-and-desist order to BitConnect to halt its investment programs and five days later the Securities Division of the North Carolina Department of Secretary of State issued a similar order. On January 16, the project announced it would shut down its cryptocurrency exchange and lending operations because of the orders. During this time, it has been reported that several people affiliated from the project began distancing themselves from the project and people who visited the project’s website were informed about an ICO for an offshoot token called “BitConnectX”.

Melon (MLN)

Melon Token Profile (PDF)

Melonport is a private company that is building the open source Melon protocol, which hopes to enable decentralized digital asset management on the Ethereum blockchain. The protocol will support the trading of different tokens and will enable users to set up their own portfolio structures, manage digital assets with pre-defined parameters, invest in other portfolios, have others invest in theirs, and build an auditable visible track record for regulatory compliance purposes. The team has strong technical and finance experience and is advised by Dr. Gavin Wood (former CTO of Ethereum), Dr. Andreas Glarner (Partner at MME Legal) and Jeahan Chu (Managing Partner at Kenetic Capital).

Stox (STX)

Stox Token Profile (PDF)

Stox is an open source, Ethereum-based platform for prediction markets where people can trade tokens representing the outcomes of future events. It is a spin-off of Invest.com, an established player in the financial market that sees $50M in annual revenue. Invest.com’s team continues to be heavily involved in the development of Stox. All activity in the Stox network revolves around its native STX token, which was released using the Bancor platform. It is used as the primary mechanism for paying fees, collaterals and betting on event outcomes.

TokenCard (TKN)

TokenCard Token Profile (PDF)

TokenCard is tokenized debit card system that attempts to enable holders of its native token to spend ERC20 tokens at debit card terminals around the world. It has four core elements: (1) the wallet, which secures users’ assets and enforces user-set spending and security parameters; (2) the TokenCard, which connects the wallet to the network; (3) the TokenCard App, which provides the frontend of the platform; and (4) the native TKN token, which has a pro-rata claim to a diversified pool of assets collected from fees on the TokenCard network. TKN’s underlying value is derived from an accumulation of other ERC20 tokens. The underlying tokens are secured inside a TKN Asset Contract from which TKN holders can redeem their pro-rata share. During the token sale, a bug was found that allowed some ICO participants to allegedly gain up to 1,100% in extra tokens. In May 2017, TokenCard said that it was “constructing a solution,” but as of 2018 it is still not clear if or how this was resolved.

SingularDTV (SNGLS)

SingularDTV Token Profile (PDF)

SingularDTV is a blockchain-based digital content distribution and management platform that hopes to lay the foundation for a decentralized entertainment industry. Building the future of rights management, project funding, and peer-to-peer distribution, SingularDTV’s platform provides artists and creators with tools to manage projects from development to distribution using blockchain technology. It relies on a tokenized ecosystem based on Ethereum to help artists and creators benefit from more transparent media production and distribution. In November of 2017, TOKIT, the first SingularDTV application was released. TOKIT attempts to assist artists by allowing them to tokenize their intellectual property. 

Lykke (LKK)

Lykke Token Profile (PDF)

Lykke is a commission free decentralized exchange built on top of the Bitcoin network and allows for the trading of financial instruments in the form of digital tokens. These tokens are called “colored coins” and allow financial institutions to represent real world assets in the form of digital tokens. The native LKK token represents stock in the company Lykke Corp., a Swiss registered company, and is only currently trading on the Lykke Exchange.

Safe Exchange (SAFEX)

Safe Exchange Token Profile (PDF)

Safe Exchange Token (“SAFEX”) is a digital asset built on the Omni Protocol. The SAFEX platform enables anyone to create digital assets or issue smart contracts. The development team is building the Chille blockchain, which hopes to establish a marketplace for people to transfer money and buy or sell goods and services anonymously, anywhere, and very quickly. The project plans to switch to the Chille blockchain from Omni once it is completed. When a transaction occurs on this new blockchain, a network fee will be charged, and part of this fee will be paid to SAFEX holders regularly in the form of a dividend. The project hopes to eventually transition to a decentralized autonomous organization model where decisions are made by a vote of the token holders. Other than its Chief Architect and Founder, Daniel Dabek, the team appears to lack meaningful backend experience.

Ubiq (UBQ)

Ubiq Token Profile (PDF)

Ubiq is a fork of Ethereum that promises a stable and improved version of the Ethereum codebase. It was built on Ethereum v1.5.8 but changed its block creation time to a fixed 88 seconds, as well as its hashing mechanism. Ultimately, the monetary policy employed by the project decreases this inflation to 1 UBQ per block (0.7%) over a period of 8 years, most recently in January 2018. We were unable to verify the number of decentralized applications hosted on the Ubiq platform and, at the time of writing, most blocks on the Ubiq blockchain have very few transactions. 

Mysterium (MYST)

Mysterium Token Profile (PDF)

Mysterium is a project that is attempting to create a decentralized marketplace where participants can rent their unused VPN bandwidth or purchase VPN bandwidth from other users. It aims to be a fully decentralized, P2P and server-less VPN node network that provides privacy to its users and financial incentives to its node operators. Once launched, the project claims that there will be several types of VPN services available. IP tunneling and Socks proxy style services are expected to be the first to be implemented.