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In a lawsuit filed Monday against crypto exchange Bittrex, the SEC named six crypto tokens listed on the platform as securities.
The SEC’s complaint lists DASH, ALGO, OMG, TKN, NGC and IHT. The agency alleges that token investors had “reasonable expectation of profits,” meaning the assets should be considered securities under US law.
The SEC says Bittrex and William Shihara, who served as CEO from 2014 to 2019, coordinated with token issuers who sought to have their crypto asset listed on Bittrex 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.”
DASH investors in particular were operating under the assumption that the growth and development of the Dash blockchain would increase the value of the tokens, the SEC said.
The Algorand blockchain team followed a similar strategy by boosting the token and promising growth opportunities to holders, the SEC alleged.
“In other words, in promoting the ALGO token sale, the Algorand Foundation tied the potential growth of the Algorand blockchain to potential demand for the ALGO token itself, and to its own commitment to preserving a price floor for ALGO,” the complaint suggests.
The SEC also claims Bittrex operated as an “unregistered exchange, broker and clearing agency,” according to a statement from the agency. Bittrex’s international affiliate Bittrex Global GmbH is also facing charges.
Bittrex, which revealed it would be winding down US operations on Friday, had been tipped off in March that the SEC would proceed with a lawsuit, according to reports.
It is not the first time the SEC has opted to include securities allegations in lawsuits against individuals and firms. In its 2022 lawsuit against former Coinbase employees for alleged insider trading, the agency said nine crypto tokens were securities.
Earlier this year, former Coinbase product manager Ishan Wahi and his brother asked a US court to drop the case, arguing that the SEC’s definition of securities is wrong.
“The term ‘investment contract’ requires — as the statute says — a contract. But here there are no contracts, written or implied,” lawyers for the brothers said. “The developers who created the tokens at issue have no obligations whatsoever to purchasers who later bought those tokens on the secondary market. And with zero contractual relationship, there cannot be an ‘investment contract.’ It is that simple.”
The SEC is expected to file its opposition to the motion this summer.
As of Monday, the SEC had not announced charges against any of the issuers of DASH, ALGO, OMG, TKN, NGC and IHT.
News analysis by David Canellis
There’s two glaring red flags buried inside these charges: how the SEC views network validators and how it considers protocol-specific foundations.
DASH was launched with no ICO, no investment contract, and proof-of-work mining. Does this mean the SEC is coming for Bitcoin? Probably not, although it’s ominous, and under Gensler’s oversight it’s hard to rule out any action at all.
The agency has a beef with DASH, in part, over how it incentivizes participation. Users can stake a certain amount of DASH to run a so-called “Masternode” — validating transactions and receiving a cut of network revenue for doing so.
Funneling a portion of those funds towards further developing the protocol makes DASH a security, the SEC says, as it might affect its value. This could be paving the way to target other blockchain ecosystems with similar feedback loops for network improvement, which if you squint aren’t so dissimilar from Ethereum under proof of stake.
The other red flag is how the SEC views Algorand’s non-profit foundation. DASH’s Masternodes are an integral part of the network, while the Algorand Foundation has received a portion of the supply to distribute throughout the ecosystem over time. The same argument goes: investors will benefit from the efforts of others, in this case a foundation, tasked with allocating funds to further development.
Multiple major blockchain ecosystems rely on foundations like these to steward their development, from Ethereum to Solana and ApeCoin, many of them DAOs — which we already know regulators could consider centralizing forces.
All this suggests we may be in for further SEC overreach in the future. Better buckle up.