Updated: SEC Charges Crypto Trading Platform Bittrex with Violation of Securities Laws | Practical Law

Updated: SEC Charges Crypto Trading Platform Bittrex with Violation of Securities Laws | Practical Law

The SEC filed charges against crypto-asset trading platform Bittrex, Inc., its foreign affiliate Bittrex Global GMBH, and its co-founder and former chief executive officer for US securities laws violations, including operating as an unregistered broker, national securities exchange, and clearing agency.

Updated: SEC Charges Crypto Trading Platform Bittrex with Violation of Securities Laws

by Practical Law Finance
Published on 18 Aug 2023 • USA (National/Federal)
The SEC filed charges against crypto-asset trading platform Bittrex, Inc., its foreign affiliate Bittrex Global GMBH, and its co-founder and former chief executive officer for US securities laws violations, including operating as an unregistered broker, national securities exchange, and clearing agency.
On April 17, 2023, the SEC filed a complaint charging crypto-asset trading platform Bittrex, Inc., its foreign affiliate Bittrex Global GMBH (Bittrex Global), and its co-founder and former chief executive officer (CEO), William Shihara, with violations of:
  • Section 5 of the Securities and Exchange Act of 1934, as amended, (Exchange Act) (15 U.S.C. § 78e) for the use of an exchange to effect transactions in a security without registering as a national securities exchange under Section 6 of the Exchange Act absent an exemption from such registration, specifically providing a marketplace that, among other things, brings together orders of multiple buyers and sellers of crypto assets and matches and executes these orders, including the use of a single shared order book between Bittrex and Bittrex Global.
  • Section 15(a) of the Exchange Act (15 U.S.C. § 78o(a)) for the facilitation or inducement of the purchase or sale of securities without registering as a broker and without an exemption from such registration, specifically for operating as broker-dealers by soliciting potential investors, handling customer funds and assets, and charging a fee for these services.
  • Section 17A(b) of the Exchange Act (15 U.S.C. § 78q-1(b)) for the performance of functions of a clearing agency with respect to securities without registering in accordance with Section 17A(b) of the Exchange Act absent an exemption or exclusion from such registration, specifically by operating as a clearing agency by holding customer assets in Bittrex-controlled wallets and settling consumer transactions by debiting and crediting the relevant customer accounts.
According to the complaint, Shihara was the control person under Section 20(a) of the Exchange Act (15 U.S.C. § 78t(a)) from the founding of the Bittrex crypto-asset trading platform (platform) in 2014 through at least November 2019. Shihara also served as Bittrex's CEO until about November 2019. During this period, Shihara was responsible for the day-to-day operation and management of Bittrex, including financing activities and the creation of Bittrex's website from which customers access the Bittrex platform. Since 2014, customers could buy, sell, and trade on the platform crypto assets that the SEC alleges include crypto-asset securities.
The complaint further alleges that Bittrex, during Shihara's tenure as CEO, coordinated a "problematic statement cleanup" campaign to direct issuers of crypto assets to "scrub" their public statements of any language that could raise questions from the SEC as to whether these crypto assets were offered and sold as securities, while still allowing those securities to be traded on Bittrex.
According to the complaint, Bittrex earned at least $1.3 billion in revenue from the transactions on its platform from 2017 through 2022.
Notre that certain affiliates of Bittrex filed for US bankruptcy protection under Chapter 11 in May 2023 (see Practice Note, Bankruptcy: Cryptocurrency Case Tracker: Desolation Holdings, LLC (affiliate of Bittrex, Inc.)).
Update: On August 10, 2023, the SEC announced that Bittrex and Shihara agreed to settle charges that they operated an unregistered national securities exchange, broker, and clearing agency. Bittrex Global also agreed to settle charges that it failed to register as a national securities exchange. For more information, see OPINION: SEC Enforcement Involving Bittrex and Its CEO Offers Mixed Message (Thomson Reuters Regulatory Intelligence subscription required).
Thomson Reuters Regulatory Intelligence (TRRI) noted the following in a recent article (subscription required) regarding the SEC's Bittrex settlement:
The article also includes the following noteworthy insights from Kevin Batteh, a former attorney with the CFTC:
  • The SEC did not allege any form of fraud or misappropriation, only regulatory violations.
  • The $24 million penalty imposed against Bittrex should be contrasted with the allegations that Bittrex earned $1.3 billion and at least $130 million from listing what the SEC claimed were securities.
  • The SEC began investigating Bittrex in 2017, and Bittrex has likely incurred great cost responding to SEC charges after making a good-faith effort to register with the SEC. The US regulatory environment essentially forced Bittrex out of the US.
  • The conduct alleged in this lawsuit is the type of conduct recent legislative efforts seek to clarify and address. If the Financial Innovation and Technology for the 21st Century Act was enacted, it would have obviated the need for this lawsuit (see Legal Update, US House Financial Services Committee Advances Crypto Bills: Financial Innovation and Technology of the 21st Century (FITC) Act).
This update is based in part on material provided by Thomson Reuters Regulatory Intelligence (TRRI).