U.S. SEC Files Charges Against Dealer Offering Bitcoin-Funded Security-Based Swaps

Siamak Masnavi

On Thursday (27 September 2018), the U.S. Securities and Exchange Commission (SEC) announced via a press release that it had filed charges against a Marshall Islands-registered securities dealer 1pool Ltd (also known as 1Broker) and CEO Patrick Brunner for "allegedly violating the federal securities laws in connection with security-based swaps funded with bitcoins."  

The SEC's complaint says:

  • Investors from the United States and elsewhere were solicited to trade security-based swaps (CFDs or forward contracts);
  • It was only necessary to provide and email address and a username to open an account (i.e. no proof of ID or address was required);
  • The only way to withdraw or deposit funds was via Bitcoin;
  • An undercover Special Agent with the Federal Bureau of Investigation (FBI) was able to buy several security-based swaps from the U.S. despite not being an accredited investor;
  • 1Broker and its CEO "failed to transact its security-based swaps on a registered national exchange, and failed to properly register as a security-based swaps dealer."

Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office, had this to say:

The SEC protects U.S. investors across a variety of platforms, regardless of the type of currency used in their transactions. International companies that transact with U.S. investors cannot circumvent compliance with the federal securities laws by using cryptocurrency.

The SEC’s complaint, which was filed at the U.S. District Court for the District of Columbia, is seeking "permanent injunctions, disgorgement plus interest, and penalties."  The SEC is not the only U.S. regulatory body after 1Broker: according to the press release, "in a parallel action, the Commodity Futures Trading Commission (CFTC) announced charges against 1Broker arising from similar conduct."

Before the FBI seized the 1Broker's domain, 1Broker was describing itself as "a platform that allows Bitcoin users to participate in real-world markets directly with their Bitcoins", and offered "trading on over 40 selected commodity, stock, index and forex markets." 

In United States, "CFDs cannot be traded by retail investors unless on a registered exchange and there are no exchanges in the US that offer CFDs."

This was 1Broker's response on Twitter to the SEC's allegations:

Earlier today, the company placed the following notice on its 1pool.ltd website:

On September 28th 2018, our domain 1broker.com was closed by the United States Securities and Exchange Commission (SEC). This means that the trading panel is not accessible anymore - funds, servers and databases are not affected. Currently, our top priority is to allow customer withdrawals. The company holds enough funds to cover all withdrawal requests, of course. Before we can take the required steps to do that, we have to seek the permission from the authorities. During this whole process, we are supported by our lawyers and we will regularly post updates here. Please note that all emails sent to @1broker.com addresses are not received by us - we will set up an email address where you can contact us in the next 24 hours.

 

Featured Image Credit: Photo via Pexels.com

Unregulated Crypto Derivatives Exchanges Dominate Regulated Alternatives

Trading volume on unregulated Bitcoin (BTC) derivatives exchanges is growing rapidly, and continuing to far outpace their regulated-institutional counterparts, according to the most recent (March) CryptoCompare Exchange Review.

unregulated exchange volume(source: CryptoCompare)

Both OKEx and bitFlyer exchanges hosted an average daily derivative trading volume worth well over a billion dollars during March - $1.5 billion and $1.14 billion respectively according to CryptoCompare. It seems then that the older derivative stalwart BitMEX, at $645 million daily average volume, has been rapidly eclipsed by the newer exchanges.

regulated exchange volume(source: CryptoCompare)

Institutional, fiat-dealing (regulated) exchanges hosted a fraction of this volume, the highest being $70.5 million on the CME exchange. CryptoGlobe reported last month the CME’s primary competitor, the CBOE, was shuttering its Bitcoin futures products citing low demand. CME volume spiked last month, but is down this month below to January levels.

However, despite the relatively low average volume, the CME did have one bumper day of record-breaking Bitcoin futures trading volume, trading nearly $550 million worth of bitcoin on April 4th - days after Bitcoin’s unbelievable breakout from its $4,200 resistance.

Outflanked

The ease of onboarding new customers may explain why the unregulated exchanges get more attention.

In a recent interview, BitMEX CEO Arthur Hayes underlined his exchange’s ability to “onboard a [new] customer within 10 minutes,” by accepting Bitcoin and only Bitcoin for funding. In addition, no KYC/AML checks are required to trade on BitMEX, merely an email address; whereas OKEx offers margin trading only after basic KYC/AML checks. These exchanges are registered in Seychelles and Malta, respectively, specifically to avoid such onerous accounting requirements for their customers.

As CryptoGlobe covered early in 2019, however, BitMEX and other derivative exchanges including OKEx officially exclude certain citizens from trading on their platforms due to regulatory concerns, most notably US citizens.

Hayes also intimated at the upcoming launch of an interest bearing Bitcoin-only bond, which he speculated could be used to leverage credit into future Bitcoin-denominated economic activity.