securities – Fintechnically Speaking

December 6, 2024December 6, 2024 by Terry R. Weiss

Paul Atkins’ Nomination as SEC Chair Helps to Push Bitcoin Above $100k (for now), But Why…?

Almost immediately after President-Elect Trump posted his announcement of Paul Atkins to replace Gary Gensler as the SEC Chair, the crypto sector, including Bitcoin, rallied, alongside the equity market rally led by the tech sector. Cheers from crypto sector leadership followed. Sure, Chairman Gensler has been no friend of Crypto, begrudgingly approving the trading of Bitcoin-based ETFs and more significantly engaging in rule-making through enforcement. It makes sense then that the expected exit of Chairman Gensler would be applauded, but why Paul Atkins?

SEC Chair nominee Atkins served as an SEC Commissioner with Chairmen Harvey Pitt, Bill Donaldson and Chris Cox, from 2002-2008 and since, has served as the founder and CEO of Patomak Global Partners, consulting for the securities and crypto industries on all manner of topics.

Last February, while in the private sector, SEC Chair nominee Atkins agreed to be interviewed on an outwardly Libertarian podcast. He broadly declared that while the SEC should prosecute illegal activity, like FTX, the agency should also otherwise accommodate innovation to encourage the flow of capital. He stressed that regulators should be “attuned” to opportunities for innovation and “accommodate…reasonably…things that are out there to advance cost savings and innovation.” Specifically, “[t]he SEC should be there with its ear to the ground to figure out which way things are moving and should accommodate activity that’s not criminal and enable markets to flourish because…if it challenges incumbents…and it helps to bring down costs for investors and for people who are trying to raise capital…that’s the reason why we have financial markets and to have capital find its way…to businesses.”[1] This was hardly the regulation through prosecution which was a hallmark of the administration under Chairman Gensler.

While stressing innovation, SEC Chair nominee Atkins was certainly no fan of FTX, SBF or their fraud. But at its core, it was not a problem with crypto: “It happened to happen in the crypto space, but when you peel back the layers it’s the same thing that happened elsewhere, someone without proper controls without proper governance of the corporation uses other peoples’ money to do things without accountability.” Like Madoff decades before, SEC Chair nominee Atkins noted that “[SBF] was not accountable to anyone, there was no board.”

But innovation aside, there is still the fundamental question of whether crypto qualifies as a security and appropriate for SEC regulation. While the SEC under Chairman Gensler and defense counsel fought vigorously over whether crypto did or did not meet the Howey test,[2] a case decided over 60 years before Satoshi Nakamoto first implemented the blockchain, SEC Chair nominee Atkins presented a different view: he noted that the Howey case is “quite old, it’s arguable whether or not it’s still current…I could see the Supreme Court reexamining that for its coherence to the current environment and whether or not it needs to be tweaked.” In the meantime, while the regulatory issues are being resolved, SEC Chair nominee Atkins signaled that the cryptocurrency industry needed certainty in regulation akin to the SEC’s current safe harbor rules for securities offerings: “Safe harbors have done a good job in giving certainty to industry and of course in this particular industry [cryptocurrency] we need certainty, of course there’s a dearth of that now.”[3]

As someone who is committed to promoting innovation and workable regulation, while prosecuting real bad actors, it is no wonder the markets and commentators have applauded the nomination of Paul Atkins so loudly.

[1] See Keep Your Government Hands Off My Crypto | Guest: Paul Atkins | Ep 215 – YouTube.

[2] Sec. and Exch. Comm’n v. W.J. Howey Co., 328 U.S. 293 (1946).

[3] See The Capital ’19: Fireside Chat with Paul Atkins, Former Commissioner, U.S. SEC – YouTube.

November 1, 2024December 4, 2024 by Duane Morris

Crypto.com Acquires Broker-Dealer While Suing the SEC

By Terry Weiss and Alek Smolij

Crypto.com, one of the world’s largest cryptocurrency trading platforms which claims to have over 100 million users, announced this week an acquisition of Watchdog Capital, LLC, an SEC-registered broker dealer with the capability to trade traditional securities. The move is significant because while there has been a deliberate expansion into crypto by some traditional securities firms (whether it be allowing the trading of crypto ETFs or direct ownership in more limited cases), this move is interesting for another reason: on one hand Crypto.com will expect to need the regulatory support from the SEC as it undertakes this expansion, but at the same time it is suing the SEC, contending that the regulator has overstepped its authority in the crypto space.

August 14, 2024December 4, 2024 by Duane Morris

District Judge Imposes $125 million fine on Ripple Labs, Demanding No Future Securities Law Infringements after 3-plus year battle with SEC

By Mauro Wolfe

In the ongoing legal saga between Ripple Labs Inc. and the SEC, U.S. District Judge Analisa Torres of the Southern District of New York imposed a $125 million fine on Ripple Labs, a provider of digital asset infrastructure for financial services, and restrained the company from violating U.S. securities laws in the future.

The SEC v. Ripple Labs case is a significant precedent in the cryptocurrency and commercial finance legal communities. The dispute centered around whether Ripple’s sale of XRP – a cryptocurrency developed, issued and partially managed by Ripple – constituted an unregistered securities offering. The SEC contended that XRP should be classified as a security, and therefore Ripple should have registered its transactions with the SEC. However, Ripple argued that XRP is a digital currency and not a security, asserting that the SEC’s application of securities laws to XRP was inappropriate and harmful to innovation in the cryptocurrency space.

On December 22, 2020, the SEC filed an action against Ripple and two of its executives for allegedly using an unregistered digital asset security to raise funds. The SEC charged the defendants with violating the registration provisions of the Securities Act of 1933, seeking injunctive relief, disgorgement with prejudgment interest and civil penalties.

The SEC’s lawsuit stated that Ripple and the two executives started raising funds in 2013 by selling XRP digital assets to investors in the United States and other countries in an unregistered, ongoing digital asset securities offering. The term “unregistered” is key to the SEC’s allegations because the agency’s argument centered around the nature of XRP as digital asset securities and not as a simple cryptocurrency. Additionally, Ripple allegedly gave out billions of XRP in exchange for activities like market-making and labor, contrary to a monetary compensation. In consequence, the complaint alleged that the defendants violated the federal securities laws’ registration requirements by not registering or not meeting any of the exemptions to register these kind of transactions.

Ripple disagreed, arguing that it was not adequately notified of its purported violations of registration regulations. Reluctant to categorize XRP as a security, Ripple defiantly challenged the SEC in federal court. Ultimately, the court was not persuaded with this argument entirely.

In Judge Torres’ decision on July 13, 2023, the court held that XRP “is not in and of itself ‘a contract, transaction, or scheme’ that embodies the Howey requirements of an investment contract.” Ultimately, the court found that Ripple violated the securities laws in its transactions aimed to offer XRP to institutional buyers such as hedge funds. As we have written in other blog posts, the court held that the secondary market transactions were not securities. Other courts have not followed Judge Torres’ analysis as to secondary markets. The disagreement between trial level courts in various cases leaves ultimate resolution on the application of the Howey test to cryptocurrencies to the federal appellate courts and most likely the U.S. Supreme Court, unless congressional legislation arrives first.

Following the summary judgment order from a year ago, the District Court issued the final judgment on August 7, 2024, after nearly four years of litigation. The court’s summary judgment found that some of Ripple’s transactions involving the exchange or sale of XRP were not considered in violation of the securities laws. However, the court held that XRP tokens sold to institutional investors were in violation of Howey, and awarded the SEC with $125 million civil monetary penalty and issued an injunction barring the company from future violations of Section 5 of the Securities Act.

This decision highlights the ongoing challenges that crypto markets face with regard to U.S. law and regulation. In effect, law and regulation lag behind the pace of industry.

The murky U.S. legal and regulatory landscape makes for challenges for the crypto markets and its participants. While other foreign countries are developing new laws and regulations, the sector waits for the creation of the U.S. crypto framework.

Once that happens, the United States may yet have a chance to be the leading crypto market in the world.

Special thanks to law clerk Laila Salame Khouri for her assistance with this blog post.

June 4, 2021June 8, 2021 by C. Neil Gray

SEC, Targeting Promoters, Enters the BitConnect Fray

The SEC last week sued several alleged promoters connected with BitConnect, accusing the individuals of participating in or aiding and abetting the offering of unregistered securities in violation of Section 5 of the Securities Act of 1933 and Section 15(a) of the Securities Exchange Act of 1934, and doing so without being registered as broker-dealers, as required by the federal securities laws. See SEC v. Brown, et al., No. 21 Civ. 4791 (JGK) (S.D.N.Y. May 28, 2021). According to the SEC, between January 2017 and January 2018, BitConnect, directly and through the named defendant promoters, solicited investors to participate in its “lending program,” whereby investors invested bitcoin with BitConnect in exchange for interest payments derived from value generated by a trading bot focused on profiting from the volatility of Bitcoin. According to the complaint, BitConnect guaranteed a “high rate of return” (as high as 40% per month) with “no risk” from the “safe” investment. The SEC contends the promoters—including U.S.-based Trevon Brown (a.k.a. Trevon James), Craig Grant, Ryan Maasen, and Michael Noble (a.k.a. Michael Crypto)—used social media and other communications to plug the lending program in return for referral commissions—a percentage of each investment resulting from their individual efforts and the efforts of their referral network. The SEC alleges that successful promoters also received so-called “development funds” that they could use for themselves or pass on to investors in their network. According to the complaint, the promoter defendants named in the lawsuit earned referral commissions and development funds ranging from more than $475,000 to $1.3 million. Another defendant, who allegedly served as the liaison between Bitconnect and the promoters, earned more than $2.6 million. The SEC seeks injunctive relief, disgorgement plus interest, and civil penalties. According to the SEC, its investigation is ongoing.

BitConnect’s legal troubles began in early 2018 when various state regulators, including Massachusetts and Texas) opened investigations and proceedings on BitConnect. At the same time, numerous investors filed lawsuits in federal court in Florida against BitConnect and some of the same promoters sued by the SEC last week. Those civil cases, which were consolidated, fell victim to multiple successful motion to dismiss and currently are on appeal to the Court of Appeals for the Eleventh Circuit.

What can we infer from the timing of the SEC’s lawsuit? Perhaps not much. BitConnect has been condemned variously as a Ponzi scheme, a scam, a fraud, and evidence of the “common knowledge” that the Bitcoin market is being manipulated. BitConnect, then, would seem a likely candidate for the SEC’s attention. It may seem curious that the SEC’s complaint comes more than three years after state regulators and private litigants focused their efforts on BitConnect. That could simply be a function of the time required to conduct the investigation. In its press release contemporaneous with the filing of the lawsuit, the SEC thanked “the Cayman Islands Monetary Authority, the Hong Kong Securities and Futures Commission, the Monetary Authority of Singapore, the Ontario Securities Commission, the Romanian Financial Supervisory Authority, and the Thailand Securities and Exchange Commission.” That is a lot of helping hands. Or perhaps the SEC has other developments on its mind. There are several applications for Bitcoin exchange-traded funds (ETFs) currently pending before the SEC, and the SEC has previously denied similar applications, inter alia, because of concerns about manipulation in the market for Bitcoin. So perhaps the timing is not so curious. Then again, the conduct at issue in the SEC’s lawsuit occurred in 2017-2018, making any connection to the state of the current market for Bitcoin more tenuous. At the very least, one must keep in mind the SEC’s mission to protect investors and maintain fair, orderly, and efficient markets; the SEC’s case against BitConnect reaffirms that one cannot assume that conduct well in the past has flown below or escaped the SEC’s pursuit of its mission.