On Monday, the U.S. Securities and Exchange Commission filed a lawsuit against the Seattle-based crypto exchange Bittrex and its former CEO William Shihara, alleging that the company acted as an unregistered securities broker-dealer. The complaint states that Bittrex earned at least $1.3 billion in illicit revenues from 2017 through 2022, including fees coming from US investors.
The lawsuit also names the exchange's foreign affiliate, Bittrex Global GmbH, alleging that it failed to register as a national securities exchange “in connection with its operation of a single shared order book along with Bittrex.”
"Today’s action, yet again, makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity," SEC Chair Gary Gensler said in a statement. "As alleged in our complaint, Bittrex and issuers that it worked with knew the rules that applied to them but went to great lengths to evade them by directing issuer-applicants to ‘scrub‘ offering materials of information indicating that certain crypto assets were securities."
The SEC alleges that Bittrex and Shihara, who was the company’s CEO from 2014 to 2019, directed projects that sought listing on the exchange to delete certain “problematic statements” from their public channels to avoid scrutiny from the securities watchdog. Bittrex has also repeatedly delisted coins they knew could qualify as securities in an attempt to protect themselves from regulatory risks, leaving investors at the whim of the exchange to make timely disclosures.
“I hate people bitching that we don’t email them about market removals… I LOST SO MUCH CAUSE I DIDn’T KNOW,” an unnamed employee of Bittrex, quoted by the SEC in a filing, told one of the co-founders. The founder, also unnamed, responded that his preferred response to those investors was “go f*** yourself” or, more politely, tell them to “track your own damn investment or get a broker to do it for you.”
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Most recently, a CFTC lawsuit against Binance and its CEO Changpeng Zhao also made public some internal messages of exchange’s employees casually discussing how to sidestep compliance controls and turn a blind eye to customers doing “sick ass volumes” even if there was evidence of potential money laundering and terrorist financing.
To build its case for violation of securities law, SEC claimed that six tokens listed on Bittrex are “crypto asset securities,” namely Algorand (ALGO), OMG Network (OMG), Dash (DASH), Monolith (TKN), Naga (NGC), and Real Estate Protocol (IHT).
Algorand, the largest token by market cap named in the lawsuit, was claimed by the SEC to meet three — common enterprise, expectations of profits, and efforts of others — of four prongs of the Howey test applied to prove an asset is a security. The regulator quoted several statements made by Algorand Foundation and Algorand Inc. CEO Steven Kokinos to strengthen its reasoning.
“These statements led reasonable ALGO investors throughout the Relevant Period to expect that the demand for ALGO would likely increase based on Algorand, Inc.’s and Algorand Foundation’s efforts to increase demand for the Algorand technology, thereby resulting in a price increase for ALGO,” the SEC investigators concluded.
Ironically, Gensler used to praise Algorand for its “great technology” when he was a professor at MIT in 2019. In an old clip that resurfaced on crypto Twitter, the SEC Chair spoke fondly of the blockchain, saying that it could one day support a ride-sharing service like Uber, but admitted that the protocol still had unresolved issues — it was unclear how software updates would be coordinated and, more interestingly, whether crypto tokens qualify as securities.
At the time of writing, Algorand is trading at $0.225, down 4% over the past day. Its ALGO token currently ranks as the 42nd largest cryptocurrency, with a market cap of $1.62 billion, as per data from DigitalCoinPrice.