The Securities and Exchange Commission (SEC) has continued its approach of regulation by enforcement, charging Bittrex Inc. and its former CEO William Shihara with operating an unregistered national securities exchange, broker, and settlement and clearing service in the USA. The action represents the first time a US-based cryptocurrency exchange has been charged with operating a non-compliant national securities exchange. Bittrex's foreign affiliate, Bittrex Global GmbH, has also been charged with failing to register as a national securities exchange.
The complaint alleges that Bittrex facilitated the buying and selling of crypto-assets that were offered and sold as securities, earning at least USD$1.3 billion in revenues from transaction fees from investors from 2017 through 2022, without registering with the SEC. The charge further alleges that Bittrex and Shihara coordinated with issuers seeking to have their crypto-assets made available for trading on Bittrex's platform to delete certain "problematic statements" from public channels that Shihara believed would lead a regulator, such as the SEC, to investigate the crypto-asset as the offering of a security. Bittrex and Shihara allegedly instructed issuer-applicants to delete statements that related to "price predictions", "expectation of profit", and other "investment related terms" to avoid regulatory scrutiny.
The SEC Chair, Gary Gensler, said in a public statement that crypto-businesses essentially need to change their models to fit within the existing regime which has no specific accommodation at all for the advantages of web3:
Today's action, yet again, makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity
Gurbir S. Grewal, director of the SEC's Division of Enforcement, presented a narrative that Bittrex repeatedly chose profits over investor protection, but there has been no allegation that any user has suffered loss on Bittrex due to any specific lack of investor protection (other than users being able to purchase crypto-assets on the exchange, which are not available on any of the other national securities exchanges). The SEC alleges that Bittrex's business model was based on circumventing the registration requirements of the federal securities laws, counselling issuers of crypto-asset securities to do the same by altering their offering materials, presenting an interesting spin on the exchange trying to assist token issuers from inadvertently presenting their tokens as investments/securities, and the SEC alleges that by combining multiple market intermediary functions under one roof Bittrex was infringing the law. The action also expressly states it is aimed at sending a message to other allegedly non-compliant crypto market intermediaries. There are rumors that most, if not all, crypto exchanges in the USA have received Wells Notices indicating they may be prosecuted.
The SEC's complaint further alleges that Bittrex and Bittrex Global should have registered as an exchange as they brought together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interacted, and the buyers and sellers entering such orders agreed to the terms of a trade. The complaint further alleges that Bittrex should have registered as a clearing agency because it acted as an intermediary in making payments and deliveries upon matching sell and buy orders and maintained custody of customer assets. Finally, the complaint alleges that Bittrex should have registered as a broker because it regularly engaged in the business of effecting transactions for the accounts of others in crypto-assets that were offered and sold as securities.
In October 2022, Bittrex agreed to pay $29 million USD in fines to the U.S. Treasury Department for "apparent violations" of sanctions on certain countries and anti-money laundering laws.
The SEC and Gensler have been no stranger to controversy in recent months, with the 'regulation by enforcement' wave sweeping the US. Many in the industry believe the SEC has been ensnaring crypto companies on vague and ambivalent laws given the lack of purpose-built legislation and regulation. However, given Gensler's repeated clear comments in recent times that most tokens are securities, crypto companies operating in the US appear to be mitigating risk by moving offshore or shutting down US operations as it appears impossible for them to comply with the US rules, for example a US national securities exchange can only offer trading to brokers, not to the general public, which is of course a feature of most crypto markets.
As usual, SEC Commissioner Hester Pierce has remained a sole voice for enabling technology in the US, publishing a dissent to a proposed rule change concerning the definition of 'exchange' which would encompass DeFi and centralized crypto-asset exchanges and have, to her view, a similar impact to when the SEC considered alternative trading systems over a decade ago, noting that:
The SEC could have required them to register as national securities exchanges, but doing so would have rendered the innovation “kaput”
Her full dissent is here and is on point in relation to how the SEC is more broadly approaching crypto exchanges. It appears unlikely that the US is going to present a technology enabling path to compliance for crypto-exchanges in the near to medium term, likely rendering on-shore US exchanges in their present form 'kaput'.
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