As the SEC is conducting numerous ICO investigations, the cryptocurrency exchanges, which offer to buy, sell and trade tokens are also under a scrutiny of the SEC.
Today, the SEC issued a Statement on Potentially Unlawful Online Platforms for Trading Digital Assets indicating that a platform must register with the SEC as a national securities exchange or be exempt from registration if it offers trading of digital assets that are securities and operates as an exchange. This statement is consistent with the previous applications of the U.S. securities law to the online exchanges selling securities for cryptocurrencies.
As stated by Andrew M. Calamari, Director of the SEC’s New York Regional Office, for years ago “the registration rules are vitally important investor protection provisions, and no exemption applies simply because an entity is operating on the Internet or using a virtual currency in securities transactions.”
In 2014, the SEC sanctioned a computer programmer Ethan Burnside for operating two online venues that traded securities using cryptcurrencies without registration and for conducting unregistered offerings of securities.
According to the SEC, Ethan Burnside and his company BTC Trading Corp operated two online enterprises – BTC Virtual Stock Exchange and LTC Global Virtual Stock Exchange from August 2012 to October 2013. The exchanges provided an ability to use cryptocurrency to buy, sell and trade stocks of the businesses referenced on the exchanges’ websites. Acting as an intermediary in the sale of securities requires a broker-dealer or stock exchange license, which participants did not have.
In addition, Ethan Burnside was offering investors to buy shares in the LTC Global Virtual Stock Exchange and in a separate Litecoin mining venture he owned and operated. These offerings neither were registered with the SEC nor were conducted under any exemptions.
Ethan Burnside cooperated with the SEC and agreed to pay $58,387.07 in disgorgement and prejudgment interest (based on the exchange rate existed at the time of the violation) plus a penalty of $10,000 as well as to be barred from the securities industry with the right to reapply in two years.
In the most resent case of BitFunder filed by the SEC this year, Marc Berger, Director of the SEC’s New York Regional Office, confirmed the SEC’s position that “platforms that engage in the activity of a national securities exchange, regardless of whether that activity involves digital assets, tokens, or coins, must register with the SEC or operate pursuant to an exemption. We will continue to focus on these types of platforms to protect investors and ensure compliance with the securities laws.”
In addition to filing a complain for violation of the registration provisions of the U.S. securities law, the SEC also filed fraud charges against BitFunder and its founder Jon E. Montroll. Moreover, the U.S. Attorney’s Office for the Southern District of New York initiated a criminal investigation and filed a complaint against Jon E. Montroll for perjury and obstruction of justice during the SEC’s investigation seeking criminal penalties.
With the growing number of the cryptocurrency exchanges and various platforms selling tokens, we should expect to see more cases brought by the SEC, including in cooperation with the other agencies, against market participants, who violate the U.S. securities law.
March 7, 2018