In a letter to SEC Chair Gary Gensler, Tom Emmer and Patrick McHenry questioned the classification of airdrops as securities and pointed out some of the potential negative economic consequences. Meanwhile, the SEC has charged two fraudulent crypto platforms and settled misconduct allegations with the accounting firm Prager Metis over its audits of crypto exchange FTX. Additionally, former Alameda Research CEO Caroline Ellison's cooperation with authorities may lead to a reduced sentence for her role in the FTX collapse.
SEC Pressured Over Crypto Airdrop Rules
Two Republican lawmakers, Representative Tom Emmer and House Financial Services Committee Chairman Patrick McHenry, raised some concerns over the United States Securities and Exchange Commission's (SEC) treatment of crypto airdrops. They demand that SEC Chair Gary Gensler address their questions by the end of the month.
In a letter dated Sept. 17, Emmer and McHenry pointed to the SEC’s recent lawsuits as examples of the agency's assertions on airdrops. They fear that this approach could stifle innovation in the cryptocurrency space.
An extract of Emmer and McHenry’s letter to Gensler
The lawmakers are especially concerned by the SEC’s lawsuits against Hydrogen Technology Corporation in September of 2022 and Justin Sun in March 2023. In both cases, the SEC alleged that the companies distributed tokens through unregistered airdrops, and classified them as securities. Emmer and McHenry believe that the SEC’s stance may harm American citizens’ ability to interact with new and emerging blockchain technologies and hinder the decentralization process.
In their letter, the lawmakers also questioned how the SEC could classify crypto airdrops, which are very often distributed for free, under the Howey test. This is a legal framework for determining what constitutes a security. They also asked about the potential economic consequences of treating airdropped tokens as securities, and believe this could impact on-chain applications, economic growth, and tax revenue.
Emmer and McHenry argued that the SEC’s actions could prevent U.S. crypto users from fully taking advantage of the benefits of blockchain technology, and could potentially allow other countries to take the lead in shaping the future of the internet. They also criticized Gensler’s leadership, and stated that his policies could ensure the next generation of internet technologies will not be developed by Americans or reflect American values.
This was the second time in just over a week that Republican lawmakers scrutinized Gensler’s management of the SEC. On Sept. 10, several GOP lawmakers questioned whether Gensler’s political affiliation influenced hiring practices at the agency. They even accused the SEC of favoring people from left-leaning organizations for senior roles.
The SEC has not responded to the latest letter.
SEC Charges Fake Crypto Platforms
Despite the fact that the SEC is operating under a microscope, it is not showing any signs of slowing down its enforcement actions against the crypto sector. In fact, the regulator very recently charged two alleged fake crypto platforms, NanoBit and CoinW6, with defrauding investors and stealing their money. This is the agency’s first charges involving this type of scam.
The SEC filed two complaints against five entities and three people in the U.S. District Courts for the Eastern District of New York and the Central District of California. According to the complaints, the scams were promoted through social media platforms like WhatsApp, LinkedIn, and Instagram as part of a "relationship investment scam."
Gurbir S. Grewal, director of the SEC’s Division of Enforcement, shared that there is an increasing threat posed by these types of scams, which involve targeting retail investors with promises of lucrative returns from crypto asset investments. The SEC's legal action against these companies is part of a broader plan to fight against romance scams.
These scams have become a very serious issue in the crypto space. It is estimated that victims lost around $75 billion to these scams from 2020 to early 2024.
From October of 2023 to June of 2024, the alleged scammers behind NanoBit posed as financial professionals, and used WhatsApp groups to lure investors into the fake platform. NanoBit falsely claimed that its affiliate, NanobitUS Securities, was an SEC-registered broker, and promised big returns through fake initial coin offerings. However, instead of earning money, investors' funds were funneled to the scheme’s participants, who transferred more than $2 million to Hong Kong.
In the case of CoinW6, the SEC alleges that scammers pretended to be wealthy professionals and used LinkedIn and Instagram to start relationships with victims. The fraudsters also used WhatsApp to build romantic connections while falsely promoting returns of up to 3% daily through CoinW6’s staking and mining products.
In reality, the investments were completely fake, and when investors tried to withdraw their funds, they were met with demands for even more payments or were told that their assets were frozen because of law enforcement inquiries. Sadly, some victims were even blackmailed by using romantic communications exchanged over WhatsApp.
Prager Metis Agrees to Settle SEC Charges
Meanwhile, accounting firm Prager Metis agreed to settle with the SEC over charges of misconduct related to its audits of the now-defunct crypto exchange FTX. According to a Sept. 17 announcement, the firm will pay $1.95 million in penalties to resolve two actions.
The SEC claims that Prager misrepresented its compliance with auditing standards and failed to assess the risks tied to FTX’s connection with its sister hedge fund, Alameda Research. The settlement is still subject to court approval.
The SEC alleges that between February of 2021 and April of 2022, Prager issued two audit reports for FTX that falsely stated compliance with Generally Accepted Auditing Standards (GAAS). The firm allegedly did not follow these standards or its own policies by failing to determine if it had the necessary competence and resources to conduct the audits on FTX.
The complaint also charged Prager with negligence-based fraud. While the firm did not actually admit or deny the findings, it agreed to pay the penalty and implement remedial actions, including retaining an independent consultant to review its audit procedures and adhering to restrictions on accepting new audit clients.
Gurbir Grewal believes that Prager’s shortcomings left investors without very essential protections when making investment decisions. He shared that the resolution, which limits Prager’s ability to take on new business, will improve investor protection and serves as a warning to other audit professionals about the importance of fulfilling their gatekeeping obligations.
FTX was once one of the largest crypto exchanges, but collapsed in November of 2022 because of a severe liquidity crisis and allegations of fraud. The crisis was triggered by revelations that FTX used its native token, FTX Token (FTT), as collateral for risky loans to Alameda Research.
When the value of FTT dropped, the exchange faced a massive shortfall in customer funds, which then led to a run on withdrawals it could not fulfill. FTX filed for bankruptcy, and its founder, Sam Bankman-Fried, was convicted of fraud in November 2023.
Jorge Tenreiro, acting chief of the SEC’s Crypto Assets and Cyber Unit, also commented on the case, and stated that Prager’s failure to comply with the law is just another example of an entity cutting corners in the crypto asset market, a strategy that does not pay off.
Ellison's Cooperation Could Lead to Reduced Sentence
Caroline Ellison, the former CEO of Alameda Research, is set to face sentencing on Sept. 24. There is a possibility that she may get a more lenient sentence after a recommendation from U.S. prosecutors.
In a filing on Sept. 17, prosecutors informed Judge Lewis Kaplan of Ellison's "extraordinary cooperation" in the prosecution of Bankman-Fried, as well as her assistance in uncovering the wrongdoing at both Alameda Research and FTX. They also pointed out her credible testimony against Bankman-Fried and her openness about her own misconduct in the collapse of FTX.
While prosecutors acknowledged Ellison's participation in the schemes, they held firm that Bankman-Fried was responsible for all aspects of the crimes. Ellison, who never worked at FTX, had no involvement in the creation of the coding systems that allowed Alameda to withdraw FTX customer funds. However, she did admit to borrowing billions of dollars in FTX user funds at Bankman-Fried's direction to pay Alameda’s lenders.
After the collapse of FTX in November of 2022, Ellison started cooperating with U.S. officials and pleaded guilty to seven counts of fraud and money laundering. During Bankman-Fried's trial in October 2023, she admitted to creating fraudulent balance sheets to conceal Alameda's borrowing of $10 billion from FTX. Bankman-Fried was convicted of all seven felony counts and was sentenced to 25 years in prison.
Ellison's whereabouts have remained largely unknown since her testimony, but her lawyers have requested time served and three years of supervised release. Prosecutors also shared that Ellison provided valuable assistance in civil cases filed by the SEC and Commodity Futures Trading Commission (CFTC), which were deferred until after Bankman-Fried's criminal trial.
While Bankman-Fried received quite a lengthy prison sentence, other FTX executives who cooperated with prosecutors, including Ryan Salame, Gary Wang, and Nishad Singh, have also pleaded guilty and are awaiting sentencing.
