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The Bittrex digital assets exchange is the latest to be accused by the U.S. securities regulator of trafficking in unregistered securities.
On Monday, the U.S. Securities and Exchange Commission (SEC) filed a complaint against Bittrex Inc, Bittrex Global Gmbh, and the exchange’s co-founder/former CEO William Shihara. The SEC action was filed in the U.S. District Court for the Western District of Washington’s Seattle Division.
The complaint accuses the Bittrex entities of acting as broker-dealers, exchanges, and clearing agencies since their 2014 launch while failing to register with the SEC as entities offering such services. Since that launch, the SEC claims Bittrex generated “at least $1.3 billion” in revenue from customers, many of them U.S.-based. The SEC alleges that Bittrex placed these customers “at significant risk” by “servicing them in these unregistered capacities.”
The Washington-based Bittrex recently announced that it was withdrawing from the U.S. market effective April 30 due to “continued regulatory uncertainty.” However, the Wall Street Journal reported Sunday that Bittrex received a Wells notice from the SEC last month alerting them that an SEC enforcement action is imminent.
Last October, Bittrex was fined nearly $30 million for “deficiencies related to Bittrex’s sanctions compliance procedures.” Specifically, the exchange was accused of allowing accounts in countries under U.S. economic sanctions to trade hundreds of millions of dollars’ worth of various digital assets. Bittrex had outsourced screening for sanctions violations to a third party that proved unable to meet compliance standards.
Bittrex’s general counsel, David Maria, told the Journal that “the lack of regulatory clarity [in the U.S.] results in substantial costs and no certainty as to what can and can’t be offered.” Maria claimed that Bittrex had considered registering with the SEC last year but balked when it realized how many of its revenue-generating services it would have to shut to meet the regulatory requirements.
SEC chairman Gary Gensler said Monday that Bittrex had made “cosmetic alterations [that] did nothing to change the underlying economic realities of the offerings and Bittrex’s conduct. Today we’re holding Bittrex accountable for its non-compliance.”
Gurbir Grewal, director of the SEC’s enforcement division, added that Bittrex “repeatedly chose profits over investor protection.” Grewal expressed the hope that Monday’s action would “send a message to other non-compliant crypto market intermediaries to follow the federal securities laws or be held accountable for their violations.”
The complaint seeks to permanently enjoin the defendants from further violations of securities law, prohibit further dealings with U.S. customers and to disgorge—on a jointly and severally basis—”all ill-gotten gains,” plus pay civil money penalties.
Bittrex issued a statement expressing disappointment with the SEC’s action, repeating the now standard ‘regulation by enforcement’ mantra. Bittrex insisted that it “operated within the parameters of the law at all times and we look forward to vindicating our position in court.”
— Bittrex (@BittrexExchange) April 17, 2023
Words matter
In addition to the general charge of offering unregistered securities, the complaint details how Bittrex engaged in a “coordinated campaign” to “direct issuers of crypto assets to ‘scrub’ their public statements of any language that could raise questions from the SEC as to whether these crypto assets were offered and sold as securities while allowing those securities to be traded on its platform.”
The SEC says this “problematic statement cleanup” campaign involved deleting “investment-related terms” from public statements by crypto asset-issuers. This campaign sought to “conceal the true nature of the offerings from the public and regulators,” which the SEC states as proof that Bittrex “understood the test to determine whether a crypto asset was being offered and sold as a security.”
For example, among the offending phrases targeted by the campaign were anything involving “price prediction” and statements related to “expectation of profit,” which would trigger elements of the Howey test for identifying securities. Shihara is fingered as the leader of the ‘scrubbing’ campaign, which “was nearly always done after the initial offering of the crypto asset” on Bittrex. (Emphasis in the original.)
Bittrex helpfully provided employees with a ‘cheat sheet’ to identify “problematic features” of token projects and “problematic statements” by project leaders, whether via social media channels, project websites, or their white papers.
Tokens: the more, the merrier
Shihara is also fingered as the key decision-maker regarding which assets were listed on Bittrex. Shihara reportedly received “at least $130 million” compensation for leading Bittrex from its 2014 launch through November 2019 and was “financially motivated to make more assets available” on Bittrex.
Both Bittrex and Shihara had “monthly targets for the number of new crypto assets that would be made available on the Bittrex platform.” (Bittrex and Bittrex Global—the latter claimed to restrict access by U.S. customers—shared a single order book and matching engine. That meant U.S. customers could be matched with international users on Bittrex Global. Throughout, Bittrex exercised operational control, unilateral discretion, and decision-making on the shared platform.)
Bittrex’s process for listing a token on the exchange involved weighing the potential financial benefits with the fear that the SEC would consider it a security. In March 2017, Shirara discussed a particular token with the other two co-founders, stating that “it’s a big enough opportunity that we might want to roll the dice on the sec investigation.” Shirara added that “one idea was to have [the token project leaders] take a position in Bittrex and own the risk of an SEC investigation with us.”
In July 2017, Shirara instructed one issuer not to market their token “as any kind of investment. Stick to utility token so one of us get into trouble.” Shortly thereafter, Shirara prepared a “coin compliance checklist” to review marketing materials of the tokens already listed on Bittrex.
In April 2019, following the release of the SEC’s Framework for ‘Investment Contract’ Analysis of Digital Assets, Bittrex purged certain tokens from its platform. However, it later restored some of these tokens in order to “remain relevant” among other crypto exchanges.
Spot the security
The SEC provided several examples in which Bittrex chose to ignore ‘clear indications’ that a token was an unregistered security and listed it anyway. These included POWR, for which Shirara acknowledged concerns but allowed to be listed on Bittrex regardless.
Other tokens listed on Bittrex and cited in the SEC complaint include ALGO, DASH, IHT, NGC, OMG, and TKN. The inclusion of the Algorand protocol’s token immediately sparked howls of outrage from Crypto Twitter, which dug up old videos of Gensler praising the technology when he was still a fintech-focused MIT professor (and years before his assuming the top job at the SEC).
However, that video is from April 2019, roughly two months before Algorand launched its illegal and unregistered initial token sale. The SEC complaint v. Bittrex details the various aspects of that sale and its promotion that trigger the Howey test.
Getting back to POWR for a second, it was one of the unregistered securities featured in the SEC’s insider trading case against a former Coinbase (NASDAQ: COIN) staffer. Coinbase received its own Wells notice from the SEC last month, leaving its executive ranks in an even huffier mood than usual.
Last Monday (April 10), word broke that Vishal Gupta, Coinbase’s Head of Exchange/Markets, was leaving to pursue an unspecified blockchain project. We now know that CEO Brian Armstrong went on another stock-selling spree that same day, dumping another $1.86 million worth of his Coinbase shares, pushing his year-to-date tally close to $22 million.
Brian’s timing is impeccable, as usual, as the share price rose nearly 10% the day after he sold. Then again, selling now is probably a better option than waiting for the raft of even worse news that’s most undoubtedly waiting in the wings.
List all the tokens… no, not that one!
Previous Algorand fanboy statements aside, in announcing Monday’s charges v. Bittrex, Gensler commented: “Today’s action, yet again, makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity.”
It also, yet again, makes plain that all the exchanges that participated in the anti-competitive delisting campaign against Bitcoin SV (BSV) inevitably end up being exposed for engaging in sketchy regulatory behavior. It’s almost as if they’re so focused on listing function-free casino chips that they’re utterly confused as to what to do with a legally observant, regulatory-compliant, utility-focused technology. Odd, that.
The SEC complaint notes that registered national securities exchanges are required to have detailed and transparent standards and procedures for both listing and delisting securities. Unregistered crypto platforms declare themselves “free from any obligation to follow those provisions,” leaving investors “at the whim of the crypto asset platform to give them information about their standards and procedures for listing and delisting investments.”
The complaint details a mid-2017 private conversation between a Bittrex staffer and one of its three co-founders, in which the staffer states how much he hates “people bitching that we don’t email them about market removals.” The founder replied that his preferred response to those investors was, “go fuck yourself.”
The hot seat awaits
The SEC’s complaint against Bittrex will surely come up for discussion during Gensler’s Tuesday appearance before the House of Representatives’ Committee on Financial Services. The hearing, which was announced last week, is titled simply: Oversight of the Securities and Exchange Commission.
The Committee’s Republican chairman sent Gensler a sharply worded letter last week giving him a deadline of 5 pm Monday to fully honor a request for documents regarding last December’s arrest in the Bahamas of Sam Bankman-Fried (SBF), founder of the defunct FTX exchange. SBF was due to testify remotely to the Committee regarding FTX’s demise, and the GOP’s more conspiratorial elements believe the SEC was trying to hide something.
Last week saw a narrow 3-2 vote in which the SEC agreed to proceed with plans to add crypto trading platforms—including so-called ‘decentralized finance’ (DeFi) apps—to the SEC’s legal definition of ‘exchange.’ The two naysaying commissioners issued strong rebuttals criticizing the move, adding more fuel to the fire burning in the hearts of some Republicans regarding Gensler.
This weekend, Rep. Warren Davidson (R-OH) tweeted his plan to introduce “legislation that removes the Chairman of the Securities and Exchange Commission and replaces the role with an Executive Director that reports to the Board (where authority resides).”
Davidson claimed his legislation was intended to “correct a long series of abuses” by the securities regulator. Davidson also made it plain that Gensler was the specific target of his legislative proposal, noting that “former Chairs of the SEC are ineligible” for this new exec director position. Luckily, the GOP is too focused on Hunter Biden and drag queens to actually pass any legislation, but we’d still advise Gensler to wear an old suit on Tuesday, just in case they try to tar and feather him.
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