Now it is clearer, China is risky for your investment portfolio

According to the Investor Bulletin (according to our view):

What are some risks with investing in these structures?

Investors should carefully consider the company’s risk factor discussion in its prospectuses and annual reports when evaluating the risks of investing.  In addition to the general risks of an investment in any particular industry or region, there are specific risks to be aware of when considering an investment in a U.S.-listed company with contractual relationships with a China-based VIE (variable interest entity) structure. If the parties to the contracts between the U.S.-listed company and the China-based VIE do not meet their obligations as intended or there are effects on the enforceability of these arrangements from changes in Chinese law or practice, the U.S.-listed company may lose control over the China-based company, and investments in these securities may suffer significant economic losses.

The Chinese government has never approved these structures. Many U.S.-listed companies with contractual arrangements with China-related operating companies use VIE structures to bypass Chinese restrictions on foreign investment.  One significant risk of this structure is that the Chinese government has never expressly acknowledged it as a way to legally navigate the country’s investment restrictions. The Chinese government thus could determine at any time and without notice that the underlying contractual arrangements on which control of the VIE is based violate Chinese law. Any such determination from the Chinese government could result in a significant loss in the value of an investment in a U.S.-listed company that utilizes this VIE structure. In addition, China’s legal system is substantially different from the legal system in the United States. Should China’s legal system explicitly address the enforceability of contracts with these VIE structures, there may be risks and uncertainties concerning the intent, effect, and enforcement of its laws, rules, and regulations on these contracts. This lack of certainty may result in the inconsistent and unpredictable interpretation and enforcement of laws, rules, and regulations, which may change quickly.

Private Education Businesses case study. In July 2021, the Chinese government banned for-profit educational tutoring. Included in the ban are guidelines that specifically prohibit foreign investment in educational companies by way of VIE structures.

A breach of the contractual agreements between the U.S.-listed company and the China-based VIE (or its officers, directors, or Chinese equity owners) will likely be subject to Chinese law and jurisdiction.  All or most of the value of an investment in these companies depends on the enforceability of the contracts between the U.S.-listed company and the China-based VIE.  Any breach or dispute under these contracts will likely fall under Chinese jurisdiction and law.  For example, many agreements require that disputes be handled before a Chinese arbitration body. This raises questions about whether, and how, a U.S.-listed company or its investors could seek recourse in the event of an adverse ruling as to its contractual rights.

Investments in the U.S.-listed company may be affected by conflicts of interest and duties between the legal owners of the China-based VIE and the stockholders of the U.S.-listed company. The individual equity owners of the China-based company may have conflicting interests with the U.S.-listed company’s investors. Officers and directors of these two entities may also have differing and conflicting fiduciary duties to act in the best interests of the respective companies because they are separate companies and also because of the differing laws and regulations in the jurisdictions in which the companies are organized. These conflicts of interest and diverging duties may create issues or circumstances that adversely impact the value of the investments in the U.S.-listed company. 

Bad news for Defi?

According to the following statement from Dan M. Berkovitz, Defi (Commissioner of the Commodity Futures Trading Commission) may need to consider Commodity Exchange Act (CEA) and the CFTC regulations:

In a pure “peer-to-peer” DeFi system, none of the benefits or protections exist. There is no intermediary to monitor markets for fraud and manipulation, prevent money laundering, safeguard deposited funds, ensure counterparty performance, or make customers whole when processes fail. A system without intermediaries is a Hobbesian marketplace with each person looking out for themselves. Caveat emptor—“let the buyer beware.”

Not only do I think that unlicensed DeFi markets for derivative instruments are a bad idea, I also do not see how they are legal under the CEA. The CEA requires futures contracts to be traded on a designated contract market (DCM) licensed and regulated by the CFTC. The CEA also provides that it is unlawful for any person other than an eligible contract participant to enter into a swap unless the swap is entered into on, or subject to, the rules of a DCM. The CEA requires any facility that provides for the trading or processing of swaps to be registered as a DCM or a swap execution facility (SEF). DeFi markets, platforms, or websites are not registered as DCMs or SEFs. The CEA does not contain any exception from registration for digital currencies, blockchains, or “smart contracts.”

Apart from the legality issue, in my view it is untenable to allow an unregulated, unlicensed derivatives market to compete, side-by-side, with a fully regulated and licensed derivatives market. In addition to the absence of market safeguards and customer protections in the unregulated market, it is unfair to impose the obligations, restrictions, and costs of regulation upon some market participants while permitting their unregulated competitors to operate wholly free of such obligations, restrictions, and costs. Experience with the development of the “shadow banking” system shows that competition between regulated and unregulated entities in the same market can result in the regulated entities assuming either more risks in order to generate the higher yields necessary to compete with the unregulated competition, or seeking less regulation for themselves to level the playing field. Either of these reactions can introduce significant risks into the financial system. For all these reasons, we should not permit DeFi to become an unregulated shadow financial market in direct competition with regulated markets. The CFTC, together with other regulators, need to focus more attention to this growing area of concern and address regulatory violations appropriately.

Do you think Defi is endangering the financial system? the CFTC may think it does.

If you wonder how Robinhood get their fees

If you read Chair Gary Gensler testimony from May 6 2021 you can find the answer:

Why might brokerage firms want to increase customer trading? Who benefits from it?

In the last few years, most retail broker-dealers have stopped charging fees for trades. Instead, some make money through other streams, including a process called payment for order flow. Robinhood publicly reported $331 million in payment for order flow revenues in the first quarter of this year, more than triple the amount it brought in during the first quarter of 2020.

There are two kinds of payment for order flow I’d like to highlight: payments from wholesalers to brokers, and from exchanges to market makers and to brokers.

Here, I focus on payment from wholesalers to brokers. Here’s how that process works: retail broker-dealers enter into agreements with wholesalers, which purchase their order flow. Unlike public exchanges that must offer fair access to their publicly displayed quotes, these wholesalers can decide whether to execute these orders directly or to pass them along to be executed by the exchanges or other trading venues.

In addition, the wholesalers get valuable information from this order flow that other market participants get with a delay, if at all. In many aspects of the economy, from social media to search engines, access to data is a growing competitive advantage. Our capital markets are no different.

Higher volumes of trades generate more payments for order flow. This brings to mind a number of questions: Do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict? Are broker-dealers incentivized to encourage customers to trade more frequently than is in those customers’ best interest? What are the policy implications with regard to the data aggregated by the purchasers of order flow?

These questions, while not new, were highlighted in the SEC’s recently settled enforcement action against Robinhood. As described in the Commission’s order, certain principal trading firms seeking to attract Robinhood’s order flow told them that there was a tradeoff between payment for order flow and price improvement for customers. Robinhood explicitly offered to accept less price improvement for its customers in exchange for receiving higher payment for order flow for itself. As a result, many Robinhood customers shouldered the costs of inferior executions; these costs might have exceeded any savings they might have thought they’d gotten from a zero commission.

Finally, it’s interesting to note that neither the United Kingdom nor Canada permits broker-dealers to route retail orders to off-exchange market makers in return for payments.

There are no free meals out there, check your best execution, it might not be as good as it needs to be.

FCA list Unregistered Cryptoasset Businesses

Good service for the public by the FCA. This page is consistently updated for you benefit.

This page contains the names of UK businesses that appear to be carrying on cryptoasset activity that are not registered with the FCA for anti-money laundering purposes. Please note that this is not a complete list of all unregistered cryptoasset businesses that are operating in the UK. It contains the details of unregistered businesses that we are aware are currently operating.

From 10 January 2020, firms carrying out specific cryptoasset activities in the UK will need to comply with the amended Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) and register with the FCA. Please visit our webpages on cryptoassets AML/CTF regime. opens in a new window and cryptoasset registration. opens in a new window for more information.

To check if the firm that you are dealing with is registered for cryptoasset activities, you can search from the main page of this FS Register.

Firm Name  Principal Place of Business Contact Number Website descendingDate Added
Coinnection Ltd86-90 PAUL STREET, LONDON, EC2A 4NE, UNITED KINGDOM Mar 2021
Bitmorex Limited2ND FLOOR, HANOVER HOUSE, 30 CHARLOTTE STREET, MANCHESTER, M1 4EX, UNITED KINGDOMhttp://www.bitmorex.com09 Mar 2021
Crypto-Asset Management Ltd20-22 WENLOCK ROAD, LONDON, N1 7GU, UNITED KINGDOMhttp://www.crypto-asset.net26 Mar 2021
Crypto Traders Ltd20-22 WENLOCK ROAD, LONDON, N1 7GU, UNITED KINGDOMhttp://www.crypto-traders.ltd25 Mar 2021
Coin Corner Ltd71-75 SHELTON STREET, COVENT GARDEN, LONDON, WC2H 9JQ, UNITED KINGDOMhttp://www.coincorner.biz23 Mar 2021
Crypto Factor Limited20-22 WENLOCK ROAD, LONDON, N1 7GU, UNITED KINGDOMhttp://www.cryptofactorlimited.com23 Mar 2021
Bitcoin Holdings Ltd20-22 WENLOCK ROAD, LONDON, N1 7GU, UNITED KINGDOMhttp://www.bitcoinfibers.com23 Mar 2021
ETHLYTE CRYPTO LTD20-22 WENLOCK ROAD, LONDON, N1 7GU, UNITED KINGDOMhttp://www.ethlyte.tech23 Mar 2021
TT Blockchain Solutions Ltd223 ALLENSBANK ROAD, CARDIFF, CF14 3QZ, UNITED KINGDOM09 Mar 2021
Bitxero Mar 2021
XCOEX LIMITED24 WELLINGTON GARDENS, LONDON, SE7 7PH, UNITED KINGDOM+442 038 686 187http://www.xcoex.com23 Mar 2021
Cryptocurrency International Limited71-75 SHELTON STREET, COVENT GARDEN, LONDON, WC2H 9JQ, UNITED KINGDOMhttp://www.cryptogiftvouchers.com23 Mar 2021
Crypto Assist Ltd20-22 WENLOCK ROAD, LONDON, N1 7GU, UNITED KINGDOMhttp://www.crypto-assistltd.com23 Mar 2021
Vision Wallet LtdTHE MINSTER BUILDING, GREAT TOWER STREET, LONDON, EC3R 7AG, UNITED KINGDOMhttp://www.visionwallet.com23 Mar 2021
Gpay Limited18 STOKE ROAD, SLOUGH, SL2 5AG, UNITED KINGDOMhttp://www.cryptopoint.com09 Mar 2021
Coin Celect Ltd12 BANFIELD ROAD, LONDON, SE15 3TX, UNITED KINGDOM+447367032931http://www.coincelect.com09 Mar 2021
Bitpie UK LimitedUNIT G25 WATERFRONT STUDIOS, 1 DOCK ROAD, LONDON, E16 1AH, UNITED KINGDOMhttp://www.bitpie.com23 Mar 2021
Libracash Blockchain Ltd20-22 WENLOCK ROAD, LONDON, N1 7GU, UNITED KINGDOMhttp://www.libracash.global23 Mar 2021
CryptoCashATM, Mar 2021
Crypto Stock Trades LimitedKEMP HOUSE, 152-160 CITY ROAD, LONDON, EC1V 2NX, UNITED KINGDOMhttp://www.cryptostocktrades.co23 Mar 2021
ZCash-Global20-22 WENLOCK ROAD, LONDON, N1 7GU, UNITED KINGDOMhttp://www.zcash-global.com26 Mar 2021
Bitmax Crypto Limited70 PARTINGTON LANE, SWINTON, MANCHESTER, M27 5ZG, UNITED KINGDOMhttp://www.bitmax.io23 Mar 2021
Crypto Coins Bank7 PREMIER PARK ROAD, LONDON, NW10 7NZ, UNITED KINGDOMhttp://www.cryptocoins-bank.com23 Mar 2021
Coinbox Ltd71-75 SHELTON STREET, COVENT GARDEN, LONDON, WC2H 9JQ, UNITED KINGDOMhttp://www.coinbox.org23 Mar 2021
Crypto Outlook LtdKEMP HOUSE, 152-160 CITY ROAD, LONDON, EC1V 2NX, UNITED KINGDOMhttp://www.kovrita.io23 Mar 2021
CB Exchange LP101 ROSE STREET, SOUTH LANE, EDINBURGH, EH2 3JG, UNITED KINGDOM+44 2036088233http://www.coinsbank.com23 Mar 2021
Auto Forex Trading LtdKEMP HOUSE, 152-160 CITY ROAD, LONDON, EC1V 2NX, UNITED KINGDOMhttp://www.autoforex-trading.io23 Mar 2021
Bithumb Europe LtdKEMP HOUSE, 152-160 CITY ROAD, LONDON, EC1V 2NX, UNITED KINGDOMhttp://www.bithumb.pro23 Mar 2021
Diligio LimitedKEMP HOUSE, 152-160 CITY ROAD, LONDON, EC1V 2NX, UNITED KINGDOM+44 75 33694900http://www.dilig.io23 Mar 2021
GetCoins Ltd71-75 SHELTON STREET, LONDON, WC2H 9JQ, UNITED KINGDOMuk.getcoins.com09 Mar 2021
Gadcet Limited102-104 HIGH ROAD, ROMFORD, RM6 6NX, UNITED KINGDOM+44796161457http://www.gadcet.com30 Mar 2021
Bitpoint Ltd12 ALDERMANS HILL, PALMERS GREEN, LONDON, N13 4PJ, UNITED KINGDOMhttp://www.bitpoint-uk.com09 Mar 2021
Divi & Matt Ltd320 CITY ROAD, LONDON, EC1V 2NZ, UNITED KINGDOM09 Mar 2021
Cash4bitcoin Limited79A CORBINS LANE, HARROW, HA2 8EN, UNITED KINGDOM09 Mar 2021
Bank of Coin, http://www.bankofcoin.com09 Mar 2021
Cryptobitecoinhttp://www.cryptobitecoin.com09 Mar 2021
Bitckup Ltd20-22 WENLOCK ROAD, LONDON, N1 7GU, UNITED KINGDOM09 Mar 2021

A good reminder from the “Crypto MOM”, there is hope

According to her speech, Crypto assets enthusiasts may have hope.

It is common to hear government officials worrying about crypto’s use by criminals, even though the numbers suggest that it is used for illicit purposes less often than cash is. Perhaps, government officials should pause to consider the flip side of crypto—its value in protecting people from illicit activity. Because of its ability to reach people without intermediaries and its ease of storage, transport, and access, crypto can be an important part of the survival story of people living under the threat of harm by their families, people in their communities, or repressive governments.

While regulators need to understand and scrutinize new asset classes and technologies, excessive conservatism can impede competition, distort the market, and harm investors. The SEC, for example, has hesitated to greenlight investment products that incorporate bitcoin—let alone other cryptocurrencies. This approach is inconsistent with our limited role as a disclosure regulator, rather than a more interventionist merit regulator. Although well-intentioned, our wariness with regard to crypto deprives investors of access to products and services that they want. Moreover, caution-motivated delay makes it more difficult for us to change course should we decide to do that. If we have said no to one product sponsor, how can we say yes to another seeking to offer a similar product? Meanwhile, the market engineers around our denials by creating substitutes that do not require SEC approval.

The SEC’s reluctance to permit traditional investment vehicles to hold bitcoin or bitcoin futures has contributed to investors seeking more expensive, less convenient, or less direct substitutes, but it also has heightened the stakes of any regulatory approval for a mainstream retail product we might one day grant. By waiting we also have magnified the first-approved advantage in the bitcoin ETP or registered fund space. Moreover, because we have comported ourselves like merit regulators, investors might view any approvals as an official blessing by the Commission about the quality of the products we approve. That would be the wrong inference to draw; investors, alone or with the help of an investment professional, need to think carefully about whether any particular security—crypto-based or not—is right for them.

Tackling scam ads for financial services

Google wrote to the FCA they are do the following in order to tackle scam ads for financial services:

  • In July 2020, Google announced an update to our Financial Services policy, which made financial services advertisers subject to a requirement to complete our Business Operations Verification process. This requires advertisers to provide further information about their business model, services offered and relationships with other brands or third parties. In December, Google announced that we have the right to pause financial services advertiser accounts while they complete Business Operations Verification.
  • In addition, Google is planning to verify the identity of all advertisers on its platforms, a process we call Advertiser Identity Verification. This requires advertisers to submit personal legal identification, business incorporation documents or other information that proves who they are. Google will then use this information to generate an in-ad disclosure that shows their name and location when their ads run.
  • late last year Google updated its unreliable claims policy to restrict the rates of return a firm can advertise and ban the use of terms that make unrealistic claims. This update prohibits making unrealistic promises of large financial return with minimal risk, effort or investment. Many thanks to the FCA teams for their feedback on this subject, which we have incorporated into Google’s policy enforcement.

From the other side of London streets, Ofcom shared a case study, which stated the following:

Online regulation is a new and developing area. Regulators and platforms might need to test and evolve their approach to meet the dynamic nature of the market and the potential for unintended consequences.

Regulatory outcomes will be improved by platforms having their own robust systems to monitor the effectiveness and outcomes of their actions. This will be challenging to achieve and might itself require an iterative approach.

While this process is still starting, please bear in mind to do your own research, and be skeptic.

Celebrities’ needs to promote according to the law and regulation or scan better their endorsements

So say the CFTC.

The Commodity Futures Trading Commission filed a complaint charging businessman and computer programmer John McAfee, previously of Tennessee, and his former employee Jimmy Gale Watson, for engaging in a manipulative and deceptive digital asset “pump-and-dump” scheme.

According to the complaint, the defendants secretly accumulated positions in digital assets, deceptively promoted the digital assets through social media as valuable long-term investments, then sold their holdings as prices rose sharply following McAfee’s deceptive endorsements, resulting in profits in excess of $2 million. The scheme involved numerous digital assets, including verge (XVG), dogecoin (DOGE), and reddcoin (RDD). This enforcement action is the first brought by the CFTC for a manipulative scheme involving digital assets.

According to the CFTC’s complaint, the defendants strategically selected digital assets suitable for their scheme. As is typical of pump-and-dump schemes, they secretly accumulated a position in a digital asset through bitcoin trading in anticipation of price spikes following McAfee’s misleading public endorsements on social media. They “pumped” in the form of touting the asset in order to increase demand, while deceptively concealing the previously accumulated position and the intent to promptly sell the position. The defendants then “dumped” the digital asset by selling it into the inflated demand as price levels rose in response to their deceptive touting.

In its continuing litigation, the CFTC seeks restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations, as charged.

FCA warns consumers of the risks of investments advertising high returns based on Cryptoassets

They have put it nice and clear for you.

As with all high-risk, speculative investments, consumers should make sure they understand what they’re investing in, the risks associated with investing, and any regulatory protections that apply.

For Cryptoasset-related investments, consumers are unlikely to have access to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if something goes wrong.

Consumers should be wary if they’re contacted out of the blue, pressured to invest quickly or promised returns that sound too good to be true.

The FCA’s concerns about high-return investments based on cryptoassets include:

  • Consumer protection: Some investments advertising high returns based on Cryptoassets may not be subject to regulation beyond anti-money laundering requirements. 
  • Price volatility: Significant price volatility in Cryptoassets, combined with the inherent difficulties of valuing Cryptoassets reliably, places consumers at a high risk of losses.
  • Product complexity: The complexity of some products and services relating to Cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that Cryptoassets can be converted back into cash. Converting a Cryptoasset back to cash depends on demand and supply existing in the market. 
  • Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.  
  • Marketing materials: Firms may overstate the returns of products or understate the risks involved.

Consumers should be aware of the risks and fully consider whether investing in high-return investments based on cryptoassets is appropriate for them. They should check and carefully consider the cryptoasset business involved. 

What to do:

Step 1: Consumers should check if the firm they’re using is on the Financial Services Register or list of firms with Temporary Registration (Note: appearing on the Temporary Registration Register does not mean that the FCA has assessed them as fit and proper, nor that the FCA has determined their application for the purposes of the Money Laundering Regulations).

Step 2: If they’re not, consumers should ask the firm whether they are entitled to carry on business without being registered with the FCA. 

Step 3: If they’re not, the FCA suggests that consumers should withdraw their Cryptoassets and/or money. This is because the firm is operating illegally if it has not ceased trading by 9 January 2021.

First step AML not consumer

Please be aware for the following FCA calrification:

Many cryptoassets are highly speculative and can therefore lose value quickly. The FCA does not have consumer protection powers for the cryptoasset activities of firms. Even if a firm is registered with the FCA, we are not responsible for ensuring cryptoasset businesses protect client assets (ie customers’ money), among other things.  

It is unlikely that you will have access to The Financial Ombudsman or Financial Services Compensation Scheme, irrespective of whether a firm has temporary or full registration.

Regulation or privacy, is it time for stock stablecoin?

New speech from commissioner Hester M. Peirce, present some challenges ahead clearly.

Crypto, a way to hold easily and seamlessly transfer value, has made that principle even more powerful than ever before in history; people are able to enter into transactions with others across the world without an intermediary.

Regulators, however, are used to dealing with intermediaries, because they are easy to grab hold of and regulate. So crypto poses new challenges. Those challenges are only growing as crypto evolves. The SEC is wrestling with issues such as whether digital assets are securities, how registered entities can custody digital assets in compliance with our rules, and whether regulated investment products holding bitcoin can meet regulation standards. The explosion of decentralized finance, or “DeFi,” applications designed to displace regulated entities such as exchanges and broker-dealers will pose thorny questions and decisions for the SEC in the coming years.

As this technology gains adoption outside and now inside the legacy financial system, we should figure out a way to embrace the personal liberty principles undergirding it. If we were instead to steamroll the technology’s liberty-enhancing features under the weight of regulation, we would lose a lot of the power of the new technology to afford opportunities to people whose autonomy has previously been curbed by, for example, limited access to the traditional financial system, geographic location, social standing, or subjection to a repressive government.

The Commission has been building the Consolidated Audit Trail (“CAT”) so that it can track all equities and options orders as they wend their way through the markets. As with many other ideas that give me concern from a liberty standpoint, the objective is unobjectionable—affording regulators easy and holistic insight into what is happening in the markets. Nevertheless, the price is too high. Regulators, without having any grounds for suspicion, will be able to watch every move of every person who trades in our markets. We would not find it pleasant or appropriate for a government minder to monitor our purchases at a farmers’ market, and it is no more pleasant or appropriate in an equity market. The CAT is an example of a regulatory project that got unmoored from liberty concerns as everyone was focused on very real technical concerns.

Maybe is it time for stablecoin/s on stock/s in order to avoid the CAT? your call