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Poloniex hit with $10M fine over unregistered exchange operations

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The U.S. securities regulator has slapped a $10 million fine on Poloniex exchange in connection with its unregistered cryptocurrency exchange. Poloniex agreed to the fine and the cease-and-desist order without admitting or denying the charges.

The U.S. Securities and Exchange Commission (SEC) announced that it had entered into a settlement with Poloniex that will see the exchange pay $8.4 million in disgorgement, a prejudgment interest of over $400,000 and a civil penalty of $1.5 million, totaling to $10.3 million. According to the SEC’s press release, the watchdog would establish a Fair Fund for the benefit of the exchange’s victims.

The SEC’s charges against Poloniex all boil down to the exchange “operating an unregistered online digital asset exchange in connection with its operation of a trading platform that facilitated buying and selling of digital asset securities.”

From July 2017 to November 2019, Poloniex operated a web-based trading platform that allowed its users to buy and sell digital assets, some of which were investment contracts and thus securities. According to the watchdog, the Poloniex trading platform met the criteria for an exchange as defined by U.S. securities laws.

Despite operating all these services, Poloniex didn’t register as a national securities exchange. The exchange also didn’t pursue an exemption from registration at any time, which would have allowed it to offer its services even without the license. This was in violation of Section 5 of the Exchange Act.

The SEC also accused Poloniex employees of stating internally that they wanted the exchange to be “aggressive in making available for trading new digital assets on the Poloniex trading platform, including digital assets that might be considered securities under the Howey test, in an effort to increase market share.”

According to the SEC, Poloniex was well aware that some of the assets it was offering were at risk of being defined as securities by the market regulator. In July 2018, the exchange purportedly determined that it would offer assets that it considered at “medium risk” of being considered securities as they would bring in substantial profits.

“Poloniex chose increased profits over compliance with the federal securities laws by including digital asset securities on its unregistered exchange. Poloniex attempted to circumvent the SEC’s regulatory regime, which applies to any marketplace for bringing together buyers and sellers of securities regardless of the applied technology,” commented Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit.

Circle Financial, the digital currency services firm which is behind USDC stablecoin, acquired Poloniex in February 2018 for $400 million. It would later spin out the exchange in October 2019 as Polo Digital Assets, excluding U.S. users due to regulatory concerns.

In its regulatory filing, Circle revealed that it had already set aside over $10 million in anticipation of the fine.

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