By Mark S. Nelson, J.D.
The SEC announced that Bittrex Inc. and its co-founder and former CEO, William Shihara, have agreed to settle the agency’s charges that the crypto firm operated as an unregistered exchange, broker, and clearing agency. All told, Bittrex and Bittrex Global will pay $24 million to resolve the case without admitting or denying the SEC’s charges. The settlement still requires court approval. Nevertheless, the settlement announcement is a significant development in light of the SEC’s recent pursuit of similar charges against other crypto exchanges and it leaves open the question of whether those other crypto exchanges may also seek to settle the SEC’s charges against them (SEC v. Bittrex, Inc. (Exhibit No. 1; Exhibit No. 2), August 10, 2023).
“For years, Bittrex worked with token issuers to 'scrub' their online statements of any indicia that they were investment contracts—all in an effort to evade the federal securities laws. They failed,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, via press release. “Today’s settlement makes clear that you cannot escape liability by simply changing labels or altering descriptions because what matters is the economic realities of those offerings.”
In April 2023, the SEC charged Bittrex, Inc. with operating an unregistered exchange, in which its crypto trading operations combined the functions of broker-dealers, exchanges, and clearing agencies while amassing revenues of $1.3 billion from, among other things, transaction fees from U.S. investors. Shihara was charged with controlling person violations.
In a press release at the time the SEC’s civil charges were announced, SEC Chair Gary Gensler suggested that federal securities laws are reasonably clear and that the main problem with crypto markets is noncompliance. "Today’s action, yet again, makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity," said Gensler. "As alleged in our complaint, Bittrex and issuers that it worked with knew the rules that applied to them but went to great lengths to evade them by directing issuer-applicants to ‘scrub’ offering materials of information indicating that certain crypto assets were securities. Further, Bittrex, as alleged, failed to register and comply with U.S. securities laws as an exchange, broker-dealer, and clearing agency. Cosmetic alterations did nothing to change the underlying economic realities of the offerings and Bittrex’s conduct. Today we’re holding Bittrex accountable for its non-compliance."
A key issue in cases alleging that a crypto exchange acted as an unregistered national securities exchange is not necessarily first whether their activities met the statutory and regulatory definitions of “exchange” under federal securities laws (although that is still a vital element of such a case), but even more importantly whether any of the crypto assets allegedly traded on a crypto exchange are “securities” within the meaning of the federal securities laws. The SEC has generally won nearly all of the cases it has brought alleging that crypto assets were securities under the Howey framework, with one notable exception recently in the U.S. District Court for the Southern District of New York, a result the SEC has said it plans to appeal and which at least one other court in the same district has disavowed regarding the court’s reasoning on the points the SEC will appeal.
Given that the Bittrex case has settled, the SEC’s main argument that crypto assets on the Bittrex platform were securities comes from the agency’s complaint and not from the settlement documents filed with the court. The SEC’s complaint had alleged that numerous crypto assets traded on Bittrex were investment contracts and, thus, securities under Howey. For example, MANA raised $5 million from investors, some of whom got discounts, and the issuer of the crypto asset allegedly sought to bar U.S. investors on fear that the crypto asset might be a security under U.S. law. With respect to the POWR token, the SEC said Bittrex “ignored” red flags that it might be a security such as a POWR feature that allocated ownership and income along with the issuer’s “controversial statements.”
By contrast, in the SEC’s case against crypto exchange Coinbase, Inc., Coinbase has asked the court to dismiss the agency’s charges on the ground that the crypto assets were not securities because they could not be investment contracts due to the lack of any underlying contractual arrangement (this argument relies extensively on the one recent federal case to go against the SEC, at least in part, regarding retail investors in secondary markets). This argument, coupled with Due Process Clause arguments about fair notice and claims the SEC lacks authority to regulate crypto assets under the Supreme Court’s major questions doctrine have shaped the crypto industry’s defense to SEC charges since the Bittrex complaint was filed. An amicus brief filed in the Bittrex case by Paradigm Operations LP made similar arguments to the effect that Howey may not apply in secondary markets.
According to the settlement, which must still be approved by the court, Bittrex and Bittrex Global must jointly and severally pay the full $24 million settlement amount, which consists of disgorgement of $14.4 million (with prejudgment interest of $4 million) and a civil money penalty of $5.6 million. Bittrex and Shihara would be permanently enjoined from future violations of Exchange Act Sections 5, 15(a), and 17A, while Bittrex Global would be enjoined from violating Exchange Act Section 5.
The case is No. 2:23-cv-00580.