In an August 3, 2021, speech at the Aspen Security Forum, Securities and Exchange Commission (SEC) Chair Gary Gensler urged lawmakers to grant him authority to oversee cryptocurrency trading. Chair Gensler made clear his concerns that the markets are “rife with fraud, scams, and abuse.” Investors, he pointed out, are unable to gain access to data to make informed investment decisions, going so far as to compare the digital asset industry to the “Wild West.”
Although digital assets were omitted from the SEC’s recently published regulatory agenda, it is clear from Chair Gensler’s speech that the SEC intends to regulate cryptocurrency markets to the maximum extent possible using its existing authority. This stance is evidenced by two recent enforcement decisions following Chair Gensler’s speech.
Florida men pay $12.8M to settle SEC charges for unregistered cryptocurrency sales
On August 9 of this year, the SEC charged two Florida men and their Cayman Islands company for unregistered sales of more than $30M of securities using smart contracts and decentralized finance (DeFi) technology. Additionally, the SEC claimed these two men misled investors concerning the operations and profitability of their business.
The defendants used DeFi contracts to sell two types of digital tokens: mTokens and DMG governance tokens. The SEC claimed that the governance tokens “were offered and sold as investment contracts and thus were securities.” The defendants settled by paying back $12.8M that they raised and agreed to fines of $125,000 each.
SEC charges Poloniex for unregistered cryptocurrency exchange
The SEC announced on August 9th that Poloniex LLC had agreed to pay more than $10M to settle charges for operating an unregistered online digital asset exchange in connection with its trading platform.
The SEC claimed that from July 2017 through November 2019, Poloniex operated a web-based trading platform that facilitated the buying and selling of digital assets, including those that were investment contracts and, therefore, securities. They further stated that the trading platform met the criteria of an “exchange” as defined by the securities laws because the trading platform provided the non-discretionary means for trade orders to interact and execute through the combined use of the Poloniex website and the trading platform. Further, Poloniex did not register as a national securities exchange, nor did it operate pursuant to an exemption from registration. Its failure to do so violated Section 5 of the Exchange Act.
Chair Gensler’s recent speech and the SEC’s subsequent enforcements in the digital assets space signal that intensified oversight initiatives in this industry are imminent. Those who participate in the digital assets industry should ensure that they are operating within the confines of the existing laws and regulations. If there is any ambiguity, we encourage fund managers to consult with legal counsel.