U.S. federal regulators step up pressure on cryptocurrency trading platforms

With the increase of new types of digital assets and related activities, the federal authorities have taken to the investigation. Recently, the SEC, FinCEN, and CFTC imposed notable regulations involving cryptocurrency trading platforms for allegedly operating without the proper approvals from financial regulators. This could be the start of the next wave of government enforcement activity.

BitMex

In FinCEN’s first coercive action against a futures trader, a high-profile cryptocurrency derivatives trading platform known as BitMEX violated bank secrecy law and regulations. application of FinCEN. BitMEX’s platform allowed clients to conduct derivative transactions, but failed to implement due diligence, policies and procedures to screen clients, such as verifying their identity. Additionally, FinCEN alleged that BitMEX failed to implement or maintain a compliant anti-money laundering program or report suspicious activity for at least 588 specific suspicious transactions, and further failed to verify the location of its customers. Although BitMEX has publicly stated that it does not do business with US nationals, some customer information has been altered to disguise the fact that they are indeed in the United States.

The FinCEN settlement was part of a broader resolution of claims the CFTC previously filed against BitMEX in October 2020 for operating an unregistered cryptocurrency derivatives platform in violation of the Commodity Exchange Act and regulations of the CFTC. The CFTC and BitMEX parties collectively resolved their claims in a settlement requiring BitMEX to pay a civil fine of $ 100 million to both FinCEN and CFTC. BitMEX has also agreed to engage an independent consultant to analyze its data and determine whether BitMEX should file additional suspicious activity reports, and also to ensure that it implements appropriate policies, procedures and controls to verify the location of its customers.

DeFi Money Market

SEC Chairman Gary Gensler recently claimed that many decentralized finance projects look like securities enough that they can and should be subject to SEC regulation. In the SEC’s first action involving ‘decentralized finance’ (DeFi) technology, two men and their company agreed to settle charges that they improperly offered a decentralized money market product known as DeFi Money Market (“DMM”), through which they have sold over $ 30 million in unregistered securities. The respondents used smart contracts to offer and sell two types of digital tokens to investors, the proceeds of which would then be used to purchase “real world” assets (eg, auto loans) and generate income for investors. In addition to the registration violations, the SEC alleged that they also distorted the operation and ownership of DMM’s assets. For example, DMM indicated via social media that its digital tokens were “oversized” and secured by auto loans of $ 8.9 million, when in reality the auto loans did not belong to DMM but to another. company controlled by the respondents.

The SEC found that the respondents had made unregistered offers and sales of securities. DMM offered two types of tokens: one offering a constant return of 6.25% and the other a “governance token” that would trade on a secondary market giving holders the right to excess profits. The two types of tokens offered by DMM are qualified as securities because they were offered and sold as investment contracts within the framework of the Howey test. Further, the SEC found that the respondents violated the anti-fraud provisions of federal securities laws by misleading investors about the operation and ownership of the assets underlying its tokens. The respondents agreed to a cease and desist order, including restitution of $ 12.8 million in profits and $ 125,000 in penalties. They were also ordered to fund smart contracts so that investors could receive all of the principal and interest owed to them. For a more detailed summary of this case, see our article here.

Poloniex

Likewise, an online trading platform known as Poloniex reached a $ 10 million settlement with the SEC for operating an unregistered digital asset “exchange” in violation of the Securities Exchange Act. The Poloniex platform has enabled users to buy and sell cryptocurrencies and other digital assets. Although it took steps to limit transactions in digital assets that it said risked being considered “securities”, the SEC has alleged that certain digital investment contracts approved by Poloniex meet the definition. of “titles”. The SEC order noted that even after the SEC released the DAO report in July 2017 (providing public guidance on digital assets as securities), Poloniex continued to be “aggressive” in approving new digital assets for trading on its platform.

Because the Poloniex platform qualified as an exchange by facilitating transactions in digital asset securities, but failed to register with the SEC, the SEC found Poloniex in violation of the section 5 of the Exchange Act. Poloniex accepted a cease and desist order, restitution of $ 8,484,313, pre-judgment interest of $ 404,995 and a civil fine of $ 1.5 million, all placed in a fair fund for the benefit of of the investors concerned.

U.S. federal regulators step up pressure on cryptocurrency trading platforms

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