SEC accuses Bittrex of conducting unregistered business

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Yesterday we reported on the decision by Bittrex, once one of the major exchanges in the world, to leave the U.S. due to impending government regulatory action. On Monday, the news was delivered the the Securities and Exchange Commission (SEC), the main financial regulatory body in the U.S., has filed a complaint against the exchange.

The former CEO and cofounder of Bittrex, William Shihara, has been accused by the US Securities and Exchange Commission (SEC) with running an unlicensed national securities exchange, broker, and clearing agency. Separate charges were brought by the agency against Bittrex Global.

In the Western District of Washington U.S. District Court, the SEC accuses the corporations and Shihara of violating the Exchange Act on four counts. Further charges are being brought against Bittrex Global “in connection with its operation of a single shared order book alongside Bittrex.”

Bittrex’s Beginnings

Bittrex was established in 2014 by Bill Shihara, Richie Lai, and Rami Kawach, and quickly became a major player in the quickly developing field of cryptocurrency exchanges. Bittrex was created to address the common problems with security, stability, and scalability that plagued early cryptocurrency exchanges. It was built on the collective experience of its creators. The founding team’s experience in security engineering at top software firms like Microsoft, Amazon, and BlackBerry prepared the ground for Bittrex’s rapid ascent.

What’s of note is that Bittrex stood out from its rivals due to its consistent dedication to security and legal compliance. The exchange put in place security features that set the standard for the industry, like two-factor authentication (2FA), mandatory wallet encryption, and recurring third-party audits. AML (Anti-Money Laundering) and KYC (Know Your Customer) regulations were strictly followed by Bittrex, thus assuring a reliable and open platform. These initiatives helped Bittrex establish a solid reputation as a trustworthy and safe exchange in the cryptocurrency industry.

Changing Times

The SEC’s accusations show how much times have changed since then. It alleges that the exchange has allowed trading of tokens which were actually securities.

The OMG, Dash, Algorand, Monolith (TKN), Naga (NGC), and IHT Real Estate Protocol (IHT) tokens traded on Bittrex, according to the SEC’s complaint, are securities. The SEC has come under fire in the past for its “regulation by enforcement” strategy, which claims tokens are securities only when it files complaints against them and not before.

Today we charged crypto asset trading platform Bittrex Inc. and its co-founder and former CEO William Shihara for operating an unregistered national securities exchange, broker, and clearing agency.https://t.co/kBsIFMp7ZA

— U.S. Securities and Exchange Commission (@SECGov) April 17, 2023

SEC, on a Roll

In what some have termed “Operation ChokePoint 2.0“, the SEC has recently targeted Coinbase and Tron, while a different American government agency (the CFTC) has also criticized Binance. To sum up, government officials are stepping up to the plate after trailing the expansion of the cryptocurrency business.

Reactions to recent SEC moves have been mixed. There is a widely held belief in the cryptocurrency community that the U.S. government overreacts in its enforcement actions, that its regulations are either too ambiguous or inappropriate for web3-related assets and activity, and that regulators should collaborate more closely with the industry to develop new regulations for what some see as a novel way of approaching the exchange of value.

Even from within the SEC, there have been dissenting voices. Last week on Friday, SEC Commissioner Hester Peirce filed a forceful dissent against Gensler’s most recent policy decision, which expands the statutory definition of a securities exchange to include cryptocurrency and digital asset exchanges.

The SEC acts like it is in denial of any wrongdoing. In a statement that might serve as a foreshadowing of forthcoming actions, the agency stated that its Bittrex-related action “makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity.” This is bad news to anyone who may be hoping that the SEC would change its stance that crypto assets are more frequently securities and should be subject to existing regulation.

The SEC claims that Bittrex actively acted so as to evade regulatory inspection:

Bittrex and [William] Shihara, who was the company’s CEO from 2014 to 2019, coordinated with issuers who sought to have their crypto asset made available for trading on Bittrex’s platform to first delete from public channels certain “problematic statements” that Shihara believed would lead a regulator, such as the SEC, to investigate the crypto asset as the offering of a security. 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.”

Bittrex responded in a statement, defending its stance and arguing there has been no clarity from the SEC. Moreover, they are stating that, on numerous occasions, they have explicitly asked the SEC to clarify what constitute securities:

For over five years, […] the SEC would not provide notice of the specific conduct that it thought violated the federal securities laws. 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.

It is interesting to note that Binance, another exchange recently targeted by the regulators, also stated that they have sought clarifications from the government agencies with regards to what constitute securities, and they never received an answer. They were sued by the Commodity Futures Trading Commission (CFTC) in late March for operating illegally in the U.S. and violating rules designed to prevent illicit financial activities.