Reserve Protocol Community AMA #9
By: Reserve Protocol Community
Tags: Blockchain, Venezuela, Reserve Protocol, Cryptocurrency, Crypto

4. Regulatory Environment

Community

Has your team done an analysis on if RSR passes the Howey test or not?

Matthew Gertler (General Counsel of Reserve)

We have our own internal analysis. While we don’t think it’s a security, it is far from clear. Rather than risk being wrong, for the time being we are keeping liquid RSR out of the US market. With regards to the sale on Huobi, we believe we did it in compliance with US security laws just to be safe

Community

In light of this renewed regulatory focus by SEC/FinCEN, is Reserve Team doing or planning to do anything differently? Regulatory outreach, secondary legal opinions, enhancing or expediting any projects within the regulatory space, etc.?

Matthew Gertler (General Counsel of Reserve)

Nothing has really changed for us. The SEC is doing what it’s always been doing: punishing people for violating securities laws. I don’t think we’ve violated any security laws, so the new SEC focus doesn’t really impact us

Regarding FinCEN, there hasn’t been any change to rule yet, so nothing has changed for us at the moment. We are very disappointed in how short a comment period was given for the proposed rule change, and are hopeful that it will be withdrawn/blocked/overturned by FinCEN/courts at the very least on procedural grounds. However, if the rule change does take affect, as a MSB registered with FinCEN, we will be required to follow it.

Community

Is Paul Atkins and the legal team working on a contingency plan if RSR is labelled a security? Is registering RSR an option?

Matthew Gertler (General Counsel of Reserve)

We do not generally comment on legal strategy. However, I will say that we believe we conducted the Huobi offering (and other offerings) in compliance with the securities laws.

Although we did not think RSR was a security, we took steps in the Huobi offering to comply with Reg S in case it was ever later labeled a security.

Community

Are any of the activities of Reserve considered a regulated financial institution and subject to possible new KYC requirements?

Matthew Gertler (General Counsel of Reserve)

We are a registered MSB with FinCEN so we would have to comply with any rule change. However, this seems a lot like midnight rulemaking, and I’m hopeful it will be withdrawn by FinCEN or blocked by a court for not following the normal procedures for making a rule change

Community

Are you able to disclose how Reserve categorize the crypto risks in certain countries at a very high level?

Matthew Gertler (General Counsel of Reserve)

Venezuela is probably the riskiest country from a legal perspective where we are legally allowed to operate. The country is part of the US OFAC’s selective sanctions regime, which you can read up on if interested. Our KYC/AML program was designed specifically for Venezuela so it should be good enough for wherever we go (of course this would be confirmed prior to going)

Venezuela is probably the riskiest country from a legal perspective where we are legally allowed to operate. The country is part of the US OFAC’s selective sanctions regime, which you can read up on if interested. Our KYC/AML program was designed specifically for Venezuela so it should be good enough for wherever we go (of course this would be confirmed prior to going)

Our KYC/AML program covers most of the risks you describe. That being said, this isn’t a program that has been signed off by a regulator, they don’t generally do that, but one that we created in conjunction with attorneys and consultants who specialize in OFAC and FinCEN. The problem with OFAC is that it is a strict liability offense. This means if we do something wrong, even if we were given fraudulent information from a user, we could be held responsible. Unfortunately there isn’t much we can do to mitigate the risk other than invest resources and time into compliance. Insurance companies generally won’t insure crypto projects

Community

What info are you able to share about your KYC/AML program without compromising confidentiality? I am interested in supporting protocols that have effective and forward-looking risk controls in light of the heightened regulatory attention on stablecoins in particular of late.

Matthew Gertler (General Counsel of Reserve)

The rules haven’t changed in the US. You need to be registered with FinCEN, which we are, and have a risk based compliance program designed to prevent money laundering and other illicit activity. We group customers into different groups based on the amount they’re allowed to transact and the risk we think they pose. Different groups provide different information which is then checked by our compliance team.

Community

Does the STABLE act proposal by US congress affect reserve protocol in anyway?

Matthew Gertler (General Counsel of Reserve)

I have little expectation that STABLE Act will get out of committee, let alone pass.

Community

How is what is happening to Ripple affect Reserve?

Matthew Gertler (General Counsel of Reserve)

What is interesting about the SEC / XRP news from a crypto law perspective is that there is no business activity I’m aware of that is regulated by both the SEC and FinCEN. PayPal is regulated as a publicly traded company by the SEC and as a money transmitter by FinCEN, but these are two different activities. Ripple Labs was fined by FinCEN in 2013.

However, the SEC has presented strong evidence that XRP is and/or was a security when it was sold to US people. I do not want to comment on the legitimacy of the SEC’s arguments but if we are going to accept their arguments, the question we keep getting on Telegram is how does this affect Reserve.

The answer is that it doesn’t have much affect on Reserve. We have neither sold liquid RSV or RSR to US purchasers, which is what Ripple is in trouble with the SEC over.

Community

If an American did buy RSR is it on the individual then? What are the ramifications if you know?

Matthew Gertler (General Counsel of Reserve)

An American couldn’t have purchased liquid RSR from us.

Any American would have acquired it on a secondary exchange. RSR does not trade on centralized US exchanges, so that person would have either had to spoof their location or acquire it on a decentralized exchange. Regardless, Reserve wouldn’t have any contractual relationship with the person who acquired the tokens on a secondary market. Liquid RSR is key here. US investors on our website acquired rights to tokens that won’t be distributed to the investors until at least mainnet launch