The US securities regulator has charged cryptocurrency exchange Bittrex and William Shihara, its Founder and former CEO, for operating as a national securities exchange, broker and clearing agency without registration.
According to US Securities and Exchange Commission (SEC), Bittrex violated registration requirements of the US federal securities law, instructed crypto issuers using its platform to delete certain information that indicated their digital assets were securities, and ran different market intermediary functions under one entity in order to maximize profits.
In addition, the regulator filed charges against Bittrex Global GmbH, a foreign affiliate of the digital asset firm, for joining hands with Bittrex to operate a single shared order book, a central system that allows traders to submit buy and sell orders for a particular asset or security, without registering as a national securities exchange.
The SEC announced the lawsuit on Monday in a statement, noting that it filed its complaint before the US District Court for the Western District of Washington. The lawsuit comes two weeks after Bittrex announced that it was winding down its US operations, blaming unclear regulatory requirements.
Bittrex Made $1.3B from Unregistered Services: SEC
According to the SEC’s complaint, since at least 2014 Bittrex enabled the buying and selling of cryptocurrencies offered as securities on its platform. The cryptocurrency made about $1.3 billion in revenue between 2017 and 2022 while serving its clients as a broker, exchange and clearing agency.
The cryptocurrency exchange generated revenue from transaction fees charged to investors, including those from the United States, among other sources of revenue. However, neither of the services ran simultaneously by Bittrex were registered, the SEC pointed out.
1/ I just read the 56-page complaint file by the @SECGov against @BittrexExchange.
— MetaLawMan (@MetaLawMan) April 17, 2023
Here's what you need to know.
The complaint names as defendants
Bittrex, Inc.,
Bittrex Global GMBH, and
William Shihara--who co-founded Bittrex in 2014.
and...
The SEC explained that Bittrex and Bittrex Global should have registered as a brokerage because they connected multiple buy and sell securities orders through a central system. On the other hand, the platform 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.”
Furthermore, the financial watchdog noted that Bittrex should have filed for registration as a clearing agency as it facilitated payments and deliveries after matching buy and sell orders. In addition, acting as a custodian of customer digital assets demanded clearing agency registration, the regulator said.
SEC Accuses Bittrex of Evading Securities Rules
In its complaint, the SEC alleged that Bittrex and Shihara, who was the company’s CEO between 2014 and 2019, helped its crypto issuers to delete certain 'problematic statements' from their public channels. These were statements Shihara believed could make the digital asset offerings categorized and investigated as securities.
“For example, in an effort to avoid regulatory scrutiny, before Bittrex would make an asset available on its platform, Bittrex and Shihara instructed issuer-applicants to delete statements related to ‘price prediction[s],’ ‘expectation of profit,’ and other ‘investment related terms,’” the SEC explained.
Speaking about the case, Gary Gensler, the SEC's Chair, noted that the case shows that cryptocurrency markets were suffering from a lack of regulatory compliance and not regulatory clarity.
"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,” Gensler noted.
Bittrex to Head to Court
Reacting to the development, Richie Lai, the Co-Founder and CEO of Bittrex, noted that the cryptocurrency exchange made an effort for years to work with the SEC on what were securities. Therefore, Lai criticized the SEC’s action, noting that “this isn’t how gov’ts are supposed to work.” He added that Bittrex will challenge SEC’s action in court.
FTR, we’ve been trying to work with the SEC for years on what they thought were securities. Now? They sue us after we announce we are leaving the US. This isn’t how gov’ts are supposed to work. We look forward to fighting this in court@BittrexExchange
— Richie Lai (@richiela) April 17, 2023
In a statement released later on Monday, Bittrex noted that securities were not offered or traded on its platform and neither did the exchange offer any products that were investment contracts. On top of that, the firm said the regulator failed to tell the exchange which of its specific conduct amounts to a violation of federal securities law despite making such requests for over five years.
"Specifically, on multiple occasions, we asked them to tell us what digital assets on our platform they viewed as securities, so that we could review and potentially delist them. They refused to do so," Bittrex noted in the statement, adding that it "operated within the parameters of the law at all times."
The SEC’s action against Bittrex comes less than a month after the Commodity Futures and Trading Commission charged Binance and the CEO, Changpeng Zhao with operating an illegal digital asset derivatives exchange. Moreover, the regulator accused Binance of insider trading and market manipulation, allegations Zhao dismissed, calling them “an incomplete recitation of facts.”
The SEC is also putting regulatory pressure on other cryptocurrency exchanges and digital asset lenders in the United States, including Coinbase, Kraken, Gemini and Genesis, among others, noting that their crypto offerings are unregistered securities.
Meanwhile, Bittrex over the year has exited many countries, citing regulatory reasons. In 2020, the cryptocurrency exchange exited seven countries, including Belarus and Ukraine. A year earlier, the firm terminated its services in 31 countries, including Afghanistan, Egypt and Trinidad and Tobago.
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