On August 9, 2021, the SEC issued a cease-and-desist order against Delaware-based Poloniex, LLC, a web-based digital asset trading platform that facilitated buying and selling of certain digital assets, including digital asset securities, in the secondary market. The SEC found that from July 2017 through November 2019, Poloniex violated Section 5 of the Securities Exchange Act of 1934 (Exchange Act) by providing its users with the ability to buy and sell digital assets that were offered and sold as investment contracts under the Howey test and, therefore, considered securities (see Practice Note, SEC Regulation of Digital Assets: The Howey Test and the SEC's April 2019 Framework for Digital Asset Regulation). Poloniex is owned by Circle, a private Irish company.

Specifically, around August 2017, Poloniex stated internally its intent to be more "aggressive" in making available for trading new digital assets that may be considered securities under Howey. Around July 2018, Poloniex further determined that it would continue to provide users of the trading platform with the ability to trade digital assets that were at "medium risk" of being considered securities.

According to the SEC, Poloniex is considered an exchange under Exchange Act Rule 3b-16(a), since it provided non-discretionary means for trade orders to interact and execute through the combined use of the Poloniex website, an order book, and the Poloniex trading engine. Poloniex was therefore required to register as a national securities exchange, and failed to either register or meet exemption requirements.

The Poloniex matter underscores the duty of a digital asset exchange to investigate the digital assets that are offered for sale on its platform, similar to the issues presented in the recent SEC Coinschedule action (see Legal Update, SEC Settles Charges Against UK ICO-Listing Website for Unlawfully Touting Digital Asset Securities).

Without admitting or denying the SEC’s findings, Poloniex consented to: