Crypto Exchange Fined by SEC for Failing to Register as a Securities Dealer
Commentary by Steven Lofchie
A cryptocurrency exchange settled charges for failing to register with the SEC as a "dealer" in securities.
According to the Order, the exchange operated an online platform on which it bought and sold crypto assets. The SEC stated that the exchange acted as a market-maker for these assets by serving as the counterparty to every transaction, marketing itself as a crypto "vending machine." The SEC said the exchange generated revenue by effecting transactions with customers at a rate favorable to the exchange, generally by charging its customers more for the crypto assets than it paid to acquire them (i.e., through the "spread" on its customer transactions).
The SEC determined that the assets bought and sold by the exchange included crypto assets that were offered and sold as securities as defined in SEA Section 3(a)(10) ("Definitions and application"). As a result, the SEC found that the exchange violated SEA Section 15(a) ("Registration and regulation of brokers and dealers").
To settle the charges, the exchange agreed to (i) cease and desist from committing or causing any violations and any future violations of Section 15(a) and (ii) pay a civil money penalty in the amount of $275,000.
SEC Commissioners Hester M. Peirce and Mark T. Uyeda criticized the enforcement action, calling it "the latest installment in the serial drama of the Commission’s poorly conceived crypto policy." The Commissioners argued that the SEC failed to identify which crypto assets were securities and provided no basis on which third parties could assess the instruments that were securities. The dissenters also pointed out that the SEC did not allege any harm to investors.
Commentary
The SEC imposed a $275,000 fine and a cease and desist order on a firm that had been out of business for over three years.
Given that the exchange had long ago stopped operating, and that no charges were brought against individuals, there was no reason for the defendants to contest the SEC's charges. Essentially, the defendants paid the SEC money so that the regulator would go away.
The dissenting Commissioners suggested that the entire enforcement action seemed half hearted, pointing out that the SEC did not even go to the trouble to say which of the crypto assets traded by the settling party were deemed to be securities. As a result, there is little import to this enforcement action; the SEC had already made it clear to the market that it disfavors crypto assets. The only benefit may be that it gave the dissenting Commissioners an opportunity, in a particularly pointed fashion, to recount the failure of the SEC's approach to the regulation of crypto assets.