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

ErisX Tells Regulator's Why Ethereum Futures Would Create Better Markets

  • Nasdaq and Fidelity Investments-backed ErisX exchange sends explanation letter to CFTC.
  • Letter explains that regulated Ether-based futures contract would create more efficient crypto markets.

ErisX, a US-based digital asset exchange, has filed a comment letter with the US Commodity Futures Trading Commission (CFTC) - after the federal regulator requested more information regarding Ethereum (ETH)’s current market.

Submitted on Friday, February 15, ErisX’s letter asserted:

The introduction of a regulated futures contract on Ether would have a positive impact on the growth and maturation of the market.

As covered, ErisX is a newly launched cryptoasset exchange that received $27.5 million in starting capital from multi-trillion dollar investment manager, Fidelity and Nasdaq Ventures, which is Intercontinental Exchange’s (ICE) VC investment division.

Consistent With CFTC's Efforts

In December 2018, ErisX’s management revealed its plans to offer bitcoin (BTC), litecoin (LTC), and ether (ETH) spot trading and it also noted that it was seeking regulatory approval - in order to list cryptocurrency futures at a later point this year. Explaining why such futures contracts would help investors, ErisX’s letter noted that “listing and trading Ether futures compliantly on CFTC regulated markets is consistent” with the financial regulator’s efforts to create “open, transparent, competitive, and financially sound derivative trading markets.”

The letter from ErisX further mentioned that regulated crypto-based futures would “prohibit fraud, manipulation, and abusive practices in connection with derivatives and other products subject to the (Commodity Exchange Act) CEA.” According to the CFTC, bitcoin can be considered a commodity as it has been designed to potentially replace existing fiat currencies (as a medium-of-exchange). Because of bitcoin and ethereum’s decentralized nature, they are arguably not securities, the CFTC has clarified on several occasions.

Explaining the differences between the Ethereum and Bitcoin protocol, ErisX’s letter has stated: 

Ethereum built upon some of the architectural principles of Bitcoin to extend [its] functionality of [a] distributed, (cryptographically) secured, (blockchain-enabled) record-keeping system to include new computational capabilities for the execution of arbitrary code.

"Unregulated Exchanges And Brokers" Trying To "Fill The Gap"

Per ErisX’s analysis of current trends in the global Ethereum (and larger digital asset) market, there is still not a proper regulatory framework in place. This, according to ErisX, has discouraged several large enterprises from entering the fragile crypto ecosystem. At present, ErisX believes there’s a trend emerging in which “unregulated or lightly regulated ‘exchanges’ [and] ‘brokers’ [are trying] to fill the gap, many of them off-shore.” However, ErisX cautioned there may be certain risks associated with this type of market such as increased volatility and liquidity fluctuations.

As noted in ErisX’s letter:

Not unique to Ether, but [current crypto markets could suffer due to] the current fragmented global market structure of trading platforms and ‘exchanges’ with significantly varying degrees of regulatory oversight and operational transparency and integrity.

By introducing standardized, CFTC-regulated Ether-based financial products, ErisX argues the crypto space might receive a more positive response from institutional investors - which could potentially lead to “more robust, liquid, and resilient markets.”