ID on the Blockchain Yes & SEC No

Jumio's ID verification service

I thought I’d start with some live pricing from Messari this week, where I’m glad to be a contributor to their analyst network and their mission of greater transparency in Crypto. I like that they show ‘Real 10’ volume based on last week’s story on Real 10 exchanges. News over nonsense is definitely about keeping it real.

For our first story, we have some fresh news from one of my secret weapons in the industry, Tony Zerucha. Tony is the managing editor of the Bankless Times and the 2018 LendIt Fintech Journalist of the Year. No one is more dialed into the fintech happenings than Tony. We’re fortunate that Tony is going to contribute his news pieces and insights here from time to time.

Let’s see what’s up with Jumio from Tony in this exclusive and why it’s a case for us investors to follow…….

Story #1: Jumio Settles Fraud Charges

A pair announcements in the past few weeks shows fintech platform Jumio continuing to distance itself from the disgraced actions of its founder and former CEO.

On April 2, the Securities and Exchange Commission announced they charged Daniel Mattes with defrauding investors in the mobile payments company. Mr. Mattes, whose LinkedIn profile still lists him as the founder of Jumio, agreed to pay $17 million to settle the charges.

The SEC alleges Mr. Mattes “grossly overstated Jumio’s 2013 and 2014 revenues before selling his personal shares to private investors in secondary markets, supposedly making $14 million along the way. These sales were apparently hidden from Jumio’s board.

The complaint states Mr. Mattes told an investor he was reluctant to sell because there was “lots of great stuff coming up” and he’d be “stupid to sell at this point.” Some bit on the offer, only to get restated Jumio 2015 numbers which wiped out most revenue and left the shares worthless after the company filed for bankruptcy in 2016.

“Mattes enriched himself at investors’ expense by making false claims about Jumio’s financial results,” said Erin Schneider, associate regional director for the SEC’s San Francisco office.  “Company executives must provide investors with accurate information irrespective of whether their companies are publicly or privately traded.”

Are you diggin’ this exclusive story from an award winning fintech journalist? Articles like this that you can only see here and more real in-depth analysis can be yours for only $7/mo or $55 per year.

Mr. Mattes is to pay more than $16 million in disgorgement and prejudgment interest along with a $640,000 penalty. An Austrian citizen, his LinkedIn profile lists him as the founder and CEO of 42.cx, an Austrian-based AI startup.

Former Jumio CFO Chad Starkey was charged with failing to exercise reasonable care concerning Jumio’s financial statements and signing stock transfer agreements that falsely implied that Jumio’s board of directors had approved Mr. Mattes’ sales. He also sold some shares in 2014 and will pay roughly $420,000 in fines.

New Phase for the Company

Jumio has been making progress with its technology. On March 19, they launched Jumio Screening, a fully automated AML screening solution that integrates ComplyAdvantage, a dynamic real-time database of people and companies that pose financial crime risk. No word on whether their former executives will show up on lists.

Then on the same day the SEC announced the charges against Mr. Mattes, Jumio’s AI-powered (artificial intelligence) Trusted Identity Service and verification processes were adopted by P2P Bitcoin marketplace Paxful to assist with their AML and KYC procedures. Paxful wishes to employ P2P finance to bring financial inclusion to the underbanked.

Jumio’s board includes Ben Cukier and Eric Byunn, the founders of Centana Growth. Together they previously led investments in Centro, Coremetrics (acquired by IBM), Covario (acquired by Dentsu Aegis Network), GMI (acquired by WPP), KVS (acquired by Veritas), MarketShare Partners, PSS Systems (acquired by IBM), Sourcecode/K2, Varicent (acquired by IBM), Aspire, Cloudmark, ETF Securities, IndexIQ (acquired by NYLife), Powershares (acquired by Invesco), Swan Global, and VelocityShares (acquired by Janus).

Our CNON Take: Great work, Tony. Thanks. This is one of the most promising areas of investment in ‘Blockchain, but not Bitcoin’: Identity. I wrote about this topic on my blog in February with Is Identity on the Blockchain a Good Investment?

It’s easy to let our Western bias think that Identity is no big deal. Yet, the truth of the matter is most people don’t live in the West, they live in Asia or Africa. Remember, 2 out of every 7 people on the planet come from India & China, both of whom have weak ID systems for their citizens.

Jumio’s ID verification is being used by Paxful, a leading peer to peer Bitcoin marketplace. We see a blending of

  • existing 2FA (two factor authentication) options for security like Authy or Google Authenticator

  • AI and

  • bank/exchange anti-money laundering/KYC policies

coming together to form the next options in security and compliance for Bitcoin exchanges. This is definitely an area to watch even if Jumio itself is not an investment opportunity for retail investors since it is still a private company. Many identity companies have a coin or token you can consider for investment if this area interests you. My blog post outlined a few options available.

Unto a story involving ICOs, other tokens, and the most important regulatory body in the world, the US SEC.

Story #2: SEC Issues No Action Letter

This week, the SEC issued a no action letter on TKJ aka Turnkey Jets.

Here is the SEC no action letter itself. It’s the first one ever for an ICO. That’s what makes it news. No action means that if TKJ does what it says it will do on its token then the SEC will not need to follow up with any enforcement actions.

The Background

TKJ is selling a utility token to be used/redeemed only for travel on their private jets. Leading crypto securities attorney Marco Santori states on Twitter the conditions under which the SEC thinks this is a utility token and not a security (meaning it would be subject to many more laws, compliance and filings than if it was only a utility token).

Marco goes on further to say that while us non-lawyer types might see these things (A-F) as very restrictive, they provide a good guideline about what in the crypto world is a security to the SEC in their current mindset.

Our CNON Take: Some of you may be thinking ‘of course this thing isn’t a security. it’s essentially a rewards and loyal customer discount program for TKJ customers.’

And you would be right.

Yet, it is important that we see an example, even if it’s an obvious one, of where a token is really a utility token and not a security.

What Do the Crypto Legal Experts Say?

When it comes to crypto securities stuff, there are 3 real experts in the field whose commentary I ALWAYS watch for and read. Marco Santori is one.

Jake Chervinsky is another. Here is a link to Jake’s thread on this topic, but you can see he is mostly pleased with this decision…

In this thread, Jake talks about the Howey test, the most common method the SEC uses to determine if something is a security. It’s an idea that sounds simple but is really complicated.

For instance, I came from the equipment leasing business. In that industry if A wants to sell an entire lease to B, they can with virtually no problem. But if A wants to sell equal parts and payments of a lease to B, C, and D, now, as a portion of a loan or lease the lease is now a security and subject to lots of different new laws including a registration filing requirement. One is not selling an investment contract and the other is….

Jake’s thread along with Marco’s on Twitter are both worth a read if you like the legal reasoning or want to see the nuts and bolts of how the SEC came to its decision. That leaves one more expert……Joshua Ashley Klayman. I just came right out and asked her the question directly

Based on the letter and Marco’s analysis, there are limits on what TKJ can do including not list the token available for sale or trade on other platforms (B on his list). Here is Joshua’s answer

I have to agree with her that getting some clarity, even if it seemed like it should be obvious, can only be a good thing. Not surprisingly, all 3 attorneys were pleased with the decision for purposes of clarity and direction going forward if nothing else.

So far, only a few weeks in and we’ve had some really meaty stories and fact-filled juicy reports to analyze. Stay tuned for more real news and for less than a cup of coffee each issue, you can get this directly into your email inbox.