The Marshall Islands has set up a not-for-profit organization to oversee the Pacific nation’s digital legal tender, the “Sovereign” (SOV).

Called the SOV Development Fund, the entity will develop, implement and maintain the infrastructure for the SOV, including the digital currency’s management and upgrade, according to a press release published Tuesday.

The government said it expects the fund to promote the use of SOV both domestically and internationally, and to establish an environment in the Marshall Islands that is conducive to the growth of crypto-based industries.

Dr. Peter Dittus, chief economist for SOV and former secretary general of the Bank for International Settlements, said:

“The SOV Development Fund’s mandate is to maintain the SOV infrastructure long term; to seed the ecosystem around the SOV; to promote the SOV and its uses, both domestically and internationally; [and] to smooth the volatility of the SOV by selling and buying SOV against USD.”

The fund will be governed by a board of directors with seven members. Two will be nominated by the government and another two by SFB Technologies – the company hired by the government to develop SOV’s blockchain infrastructure. These four directors will then appoint three more from a list of nominees from “internationally recognized luminaries in the fields of blockchain, banking, and monetary management.”

The non-profit will also be endowed with 30 percent of the circulating SOB to fund its operations, according to another document from Dr. Dittus. The SOV is planned to be used as legal tender alongside the U.S. dollar.

Early last year, the Marshall Islands announced its plan to establish the SOV as a national cryptocurrency, making it the first country in the world to move to adopt a digital legal tender.

According to the release, Minister In Assistance to the President, David Paul, said at a recent U.N. blockchain summit:

“We are designing SOV in a way that will not place any burden on the government’s finances. The currency funds itself.”

Intriguingly, the release also added that, after the SOV is launched, the aim is “to transition to an alternative governance model based on blockchain. Specific technological solutions are still being investigated.”

The launch of the SOV is proceeding in spite of a warning issued by the International Monetary Fund (IMF) last September, in which it raised concerns over the “significant risks” the digital currency poses to the country’s macroeconomic and financial stability. The IMF further warned that the SOV can be misused for criminal purposes, and the issuance would worsen the country’s money laundering and financing terrorism risk profile.

Marshall Islands flag image via Shutterstock

Tadge Dryja, who co-authored the original paper underpinning bitcoin’s experimental lightning payments network, has released a new research paper outlining a proposed scaling solution that he’s been working on for the past year.

Released Monday, Utreexo would make the part of bitcoin full nodes called the “state” (also known as the “UTXO set”) smaller and easier to run with the help of cryptographic proofs. Though the idea has been around since before CoinDesk first covered the idea in January, this paper describes the idea in greater technical detail.

Dryja is known for being one of the most prominent technologists behind the “lightning” idea, that bitcoin can scale significantly if transactions are pushed to a second layer. Several groups of developers are working to implement the technology for bitcoin payments, though it’s still experimental and not completely safe to use.

Utreexo has a similar motivation, which boils down to making bitcoin full nodes easier to run. Though they take some computing resources to set up, they’re the most secure way of using bitcoin, without needing to trust a middleman to verify that transactions on the network are real.

“As the number of users of the system increases, the UTXO set grows, and the resource cost of running a node increases. This has led to a progressively smaller proportion of users running their own node as more users rely on light clients or on [third] party nodes to inform them of the state of the network,” the paper explains.

As such, the paper outlines a way that nodes could use cryptographic proofs to store less data without compromising on security. “Nodes using the accumulator need only store a logarithmically sized representation of the UTXO set, greatly reducing storage space and disk seek times,” the paper states.

The paper also reveals the results of simulations Dryja has run showing the benefits of the scheme.

”Since January I’ve implemented more code and made the code public on GitHub, and gotten performance numbers for bitcoin mainnet download sizes,” he told CoinDesk.

Though, looking at these numbers, there is a small catch: although the storage requirements decrease overall, the proofs data increases the network bandwidth load.

“In our simulations of downloading Bitcoin’s blockchain up to early 2019 with 500MB of RAM allocated for caching, the proofs only add approximately 25% to the amount otherwise downloaded,” the paper explains.

If other developers want to take a look and pick it apart for themselves, Dryja told CoinDesk he released the code as open source so developers can test out the idea.

“It’s not integrated into a wallet yet, which will still take some time, but the library is there for people to try out,” he remarked.

Image via CoinDesk archives

When Kik’s board of directors decided to support the company’s pivot to crypto, one of the board members described it as a “hail Mary pass.”

It was early 2017 and the Canadian mobile messaging startup, having depleted its venture funding, was months away from firing everyone and calling it quits. The seven most promising leads for a potential acquisition had balked at buying the startup. Kik was in dire straits.

That’s all according to a complaint filed Tuesday by the U.S. Securities and Exchange Commission (SEC), alleging that Kik conducted an “illegal $100 million securities offering” with a September 2017 initial coin offering (ICO) for its kin token.

Details revealed Tuesday by the SEC show the company knew it faced pushback from regulators, but that didn’t stop Kik from moving forward. Other efforts to keep Kik afloat had failed. To prevent its equity holders from getting wiped out, Kik had to make the cryptocurrency path work, at least according to the version of events presented by the SEC.

In a statement released Tuesday evening, Kik CEO Ted Livingston said the SEC complaint “presents a highly selective and grossly misleading picture of the facts and circumstances surrounding our 2017 pre-sale and token distribution event. We look forward to presenting the full story in court.”

The fact that investors were never apprised of the company’s financial situation seems to be a major sticking important point for Stephan Schlegelmilch and David Mendel, the SEC enforcement staffers who authored the complaint.

Here are seven dramatic findings made by the regulators:

1. Kik was making losing money

And they were shrinking. In a year ending in mid-2016, Kik brought in $2.2 million. In a year ending in mid-2017, it brought in $1.5 million. At the time Kik decided to pursue an ICO, its expenses were running at $3 million per month.

As the complaint puts it, “Despite Kik Messenger’s initial success … Kik’s costs have always far outpaced its revenues, and the company has never been profitable.” Further, the complaint alleges, its “executives had no realistic plan to increase revenues through its existing operations.”

2. No one wanted to buy Kik

The Waterloo-based company was founded in 2009, and the regulators argue that Kik’s real peers were other mobile-first messaging companies. The complaint mentions Snapchat and WhatsApp, which both managed to repay their investors handsomely (WhatsApp with an acquisition by Facebook and Snapchat with an IPO).

According to the complaint, Kik hired an investment bank in 2016 to look for a buyer. The bank met with 35 potential buyers and seven showed interest. “By February 1, 2017, however, all seven potential suitors had declined to buy or merge with Kik,” the complaint reveals.

3. Kik disclosed more information to private-sale buyers than it did to the general public

Buyers who joined Kik’s simple agreement for future tokens (SAFT) got a discount and went through an investor accreditation check. These investors got a private placement memorandum (PPM), with more information about the company. This PPM disclosed that the Kik messenger was losing users quickly.

The complaint gives more detail on that point, saying, “Daily average users dropped from more than 10 million in January 2016 to about 6 million in January 2017.” Neither private investors nor those in the general sale got any information about the company’s financial position.

4. Kik built special e-stickers for its investors

Kik built a system for kin investors to get special digital stickers in its messenger app. According to the SEC complaint, this was an attempt to make it look like there was an actual use for the kin tokens at distribution. One executive emailed other Kik employees in June 2017 saying that “COMPLIANCE” was the only purpose behind the bare-bones sticker product.

The stickers apparently had a honey badger theme. An image of one is included in the complaint. Strangely, investors were not told the system was in development until after the sale was over.

5. CEO Ted Livingston made multiple public statements that token buyers would profit

In a February 2017 email to some employees, Livingston described how they could create a token and then “Buy today, sell tomorrow, profit.”

At a June 2017 Bitcoin Meetup in San Francisco, Livingston said the token boom would be a time in which “people are going to make a lot of money.”

At an August 2017 conference in Canada, Livingston said that “everybody can not only build this amazing new ecosystem and platform but also make a ton of money.”

6. Canadian regulators told Kik that its cryptocurrency would indeed be a security

In fact, because of that advice, Kik didn’t sell the tokens to the general public in Canada. But it never asked American regulators the same question.

Kik reached out to the Ontario Securities Commission (OSC) right after the SEC’s DAO report. By early September, OSC staff had shared the opinion that Kik’s offering qualified as a security. Canadians were barred from the public sale. Americans, as a class, were not (though some states were blocked).

7. A lot of Americans put a lot of money into the public sale

Of the roughly $100 million raised, Americans put in $55 million. Some $16.8 million of that came in the public sale.

The SEC complaint gives more detail about how they were distributed, reporting that “United States-based investors included (a) two purchasers who paid about $1.6 million and about $970,000 respectively; (b) 20 purchasers who paid about or more than $100,000; (d) 223 who paid about or more than $10,000; and (d) 1,853 purchasers who paid about or more than $1,000.”

In the complaint, the SEC seeks a variety of forms of relief, including a demand to “disgorge all ill-gotten gains” with interest and pay a civil fine.

Kik CEO Ted Livingston in April 2018, photo by Brady Dale for CoinDesk

A new ethereum-based trade finance platform has been launched in Russia with the third largest retail player in the country as a key participant.

Following a six-month pilot phase, Russian blockchain startup Factorin announced Tuesday that it’s launching its system into production with Dixy – a supermarket chain with 2 percent of the Russian market and almost $5 billion in revenue in 2018 – already on board.

Developed on a private version of ethereum, the new system will allow Dixy’s suppliers to receive payments within one business day instead of the previous two weeks. The platform connects with several banks and factoring companies (which facilitate the settlements between the retailer and multiple suppliers) via a single interface, according to Factorin co-founder Andrei Maklin.

Among the first participants are two Russian banks, Alfa Bank and Pervouralskbank, as well as several factoring companies in the country, Factorin said. The platform is available for participants via both desktop and mobile interfaces.

The product has been in the pilot phase since December and has run 12,000 test transactions over the period, Maklin told CoinDesk. “Now with the testing we see that the platform significantly reduces the time of settlement, and we’re going into production” he said.

Dixy’s chief financial officer, Julia Zhuvaga, confirmed the news, saying in a statement:

“Tech visionaries like to thrill the public with the stories of the beautiful future, but in reality, top management in any company wants to see better results not in a couple of years but as soon as possible. This platform allows us to see the change here and now.”

According to Maklin, there are about 20 nodes in its network at the moment, of which two are “full fledged” nodes on participants’ servers. Three more are now in the process of being set up, others are working in the cloud.

Dixy has become Factorin’s first major client, but Maklin is keen to ensure it’s not the last.

“Working with Dixy for us became an example of innovation in the large companies. We have ambitious plans for retail and other industries,” he said in a statement. Further down the road, the platform is planned to be scaled up and adapted for various types of business.

Dixy supermarket image via Shutterstock

The U.S. Securities and Exchange Commission has sued messenger app maker Kik for its $100 million ICO – which the agency contends was an unregistered securities sale – and the regulator appears to have built up a strong case in its initial court move.

In a complaint filed Tuesday, the SEC alleged that Kik violated federal securities law by not registering its kin token sale. In a response, Kik’s general counsel, Eileen Lyon, said that the SEC’s complaint makes a number of inaccurate assumptions which “stretch the Howey test well beyond its definition” and that the agency’s push will not withstand judicial scrutiny.

Nelson Rosario, a principal at Smolinksi Rosario Law, told CoinDesk that the SEC’s complaint against Kik was similar to others brought against other initial coin offerings, in particular with respect to the evidence that the regulator is putting forth.

“Obviously this is a very sophisticated kind of token offering, done by a company that was already established [and not a token startup] but [the] kind of evidence that the SEC brought to bear is very much the same that it’s brought against [other ICOs],” he said.

However, the most distinguishing feature of this case may be that it strictly focuses on an alleged violation of Section 5 of the Securities Act of 1933.

“Until now, all of the SEC’s contested enforcement actions have involved some element of fraud or intentional misconduct,” said Jake Chervinsky, general counsel at Compound Finance. He told CoinDesk:

“The Kik action is significant because it represents the SEC’s first enforcement action for a pure regulatory violation – that is, a case where a token issuer simply failed to register with the SEC based on its good faith interpretation of the law.

Rosario concurred, noting that this case did not involve any sort of alleged fraud, as did Stephen Palley, an attorney with Anderson Kill.

“This is a straight up ‘you didn’t register,’ this isn’t securities fraud, the allegation here is ‘you had a security and you didn’t register it,’” Palley told CoinDesk.

Strong case

Drew Hinkes, an attorney for Carlton Fields and general counsel to Athena Blockchain, said the SEC included a great number of facts in its case.

The regulator provided evidence sourced from YouTube, Slack messages, Twitter and even a roadshow that Kik conducted in the early stages of its token sale.

“The SEC has a ton of documentary evidence and a ton of facts,” he said.

This argument was repeated by Palley and Katherine Wu, an independent legal researcher.

“[It] reminds me of the Carl Sandburg quote: If the facts are against you, argue the law. If the law is against you, argue the facts. If the law and the facts are against you, pound the table and yell like hell,” Hinkes said, adding:

“Seems like there’s a lot of strong facts in the SEC’s favor … now the issuer gets to argue the law.”

The facts are likely to be the same facts that Kik will use to argue that it did not violate the Securities Act though, Wu said.

Moreover, Hinkes noted that “facts aren’t as crucial as the way the law is applied to the facts.”

On the facts, though, is where a precedent may be set.

Wu said that, in her view, Kik’s 2017 token sale “was very typical” of other ICOs at the time. The facts that are being used by the SEC to allege Kik violated securities registration requirements could then implicate other token sales, particularly those that conducted sales after the DAO report was published that year.

“If this is a win for the SEC, it will force a ton of the similarly problematic ICO projects to either have to register or disgorge any profits they made,” she said.

What’s more, the DAO report was actually referenced in the SEC’s complaint Tuesday.

‘Carrot and stick’

To some, the SEC’s lawsuit Tuesday was all but inevitable.

Chervinsky noted that the regulator has invited crypto startups to work with it, giving companies a chance to comply with federal securities laws.

He noted that the regulator has been investigating “dozens or hundreds” of companies that conducted ICOs, but Kik is the first one to go to court for a registration violation.

“The SEC has taken a ‘carrot and stick’ approach to crypto regulation … That invitation was the carrot. This enforcement action is the stick,” he said.

Similarly, Palley said this case should not be a surprise, and Kik likely anticipated the complaint.

This anticipation may even be the reason why the company started crowdfunding its legal defense, he noted, referencing the recently-announced Defend Crypto campaign that Kik launched last week. He added:

“I would be surprised if this whole thing shocked anyone.”

Indeed, Michael Arrington, one of the sponsors of the campaign, said in a statement that, “I don’t speak for the company and haven’t spoken to them since the news, but from our perspective this was anticipated and was the entire point of the campaign. We continue to fully support their right to a proper defense and hope that cases like these bring regulatory clarity to this burgeoning industry.”

Kik essentially told the SEC that it should sue by making the SEC’s Wells Notice and its subsequent response public, Chervinsky said.

“By publishing its Wells response, Kik essentially threw down the gauntlet and challenged the SEC to file suit. The fact they did so today shouldn’t surprise anyone. Kik got what it wanted: a fight in open court instead of behind the SEC’s closed doors,” he said.

Setting precedent

The fact that Kik was already an established company prior to its ICO – regardless of its financial status – means that the outcome of this case could have a broader impact compared to others. Rosario noted that Kik’s sale “involved some very sophisticated parties.”

That being said, the case has only just begun.

The SEC may have a strong complaint, but that does not necessarily mean that the case will proceed to a jury trial, Palley said, adding:

“Complaints always look bad … you always read them and think ‘that’s not good,’ that’s the whole point.”

Wu noted that “complaints are always written in a super-biased way,” as they are designed to make an argument.

A court or jury may not read the complaint as a scathing indictment (in a non-legal sense), and it is entirely possible that Kik and the SEC will come to a settlement prior to reaching a jury trial.

Further, the way the SEC opened its complaint moves away from its remit, said Diego Zuluaga, of the Cato Institute think tank.

In his view, the first few pages of the SEC’s complaint are criticizing its business model, which is not its job.

“They’re trying to bias people against [Kik],” he said.

The complaint discussed how “the Kik corporation was declining and its messaging app was losing revenue and losing users,” but the company suddenly launched a cryptocurrency, he said, concluding:

“That may or may not be the case, and I’m not taking sides … but it’s not the SEC’s job to judge business models. That’s designed to make the jury think they have fraudulent aims.”

Image via Brady Dale for CoinDesk

Blockchain startup Fluree, a Public Benefit Corporation, received a $4.7 million round of funding from 4490 Ventures, an early-stage venture capital fund, along with Revolution’s Rise of the Rest seed fund, to develop and market their decentralized data storage ecosystem.

Operating on the principles of complete data integration and immutability, Fluree hopes to eradicate the over-reliance on data silos and API bloat by building bridges off of blockchain technology.

“Fluree stores all data on a blockchain ledger that can be run internally like a traditional data store, or selectively operated in a data network across parties governed by Fluree SmartFunction rules,” wrote Flip Filipowski, co-CEO and co-founder of Fluree, in a statement.

The main goal is to break down trust-barriers between parties that had relied on traditional stores of critical data and spur collaboration across multiple parties by increasing access to and leveraging of data.

Target users of this innovation are those that have been hindered by the static, centralized models of data storage as they begin to integrate into an increasingly interconnected, information-centric world. The ledger will be accessible to those inside and outside the host enterprise, and can be used for both centralized or decentralized operations.

“Data is at the center of the new economy, yet it is managed by the same database approach we’ve had for 40 years,” said Brian Platz, co-CEO and co-founder of Fluree. “A data-centric approach simultaneously saves money, promotes secure enterprise collaboration and provides additional leverage for information across systems.”

Security is another concern Fluree is attempting to solve and to which blockchain provides an answer. To that end, FlureeSmartFunctions dynamically enforces permissions for external parties to access the data, provides proof of data tampering, and guarantees knowledge of who amended or added data.

The company acknowledges the tradeoffs involved in decentralization and will offer options to tune a company’s blockchain if speed is preferred over security.  

“If you want 100% decentralization, something like Bitcoin, it’s going to be slow. You can’t have your cake and eat it too,” Platz told TechCrunch. “If you need to, you can decrease the amount of centralization. So there’s a spectrum there, and we focus on giving people the knob to adjust that based on what they’re trying to do,”

Currently, a free version of Fluree is available for developers, as well as a scaling-priced option based on usage. Fluree also offers a licensed version for production deployments.

The product is set for a 2019 open source release.

Image via Shutterstock.