SEC Sues Bittrex Crypto Exchange and Former CEO
Regulators allege the company listed assets that required it to register and follow investor-protection rules
The Securities and Exchange Commission’s lawsuit accuses Bittrex of operating an illegal securities exchange.PHOTO: FARRAH SKEIKY FOR THE WALL STREET JOURNAL
By Dave Michaels
Updated April 17, 2023 3:24 pm ET
WASHINGTON—Securities regulators sued Bittrex, a crypto exchange that once ranked as the biggest U.S.-based platform for trading digital assets.
The Securities and Exchange Commission’s lawsuit, filed in Seattle federal court, accuses Bittrex Inc. of operating an illegal securities exchange, broker-dealer and clearinghouse. The lawsuit hinges on the claim that Bittrex listed digital assets that qualified as securities, which would have required the company to register with the SEC and follow its rules.
The SEC also sued Bittrex’s overseas platform, Bittrex Global GmbH, as well as former chief executive William Shihara, who ran the company until November 2019. Bittrex separated its U.S. and overseas operations in 2019, a couple of years after it ranked as the largest U.S.-based crypto exchange by trading volume, according to a December 2017 opinion article in The Wall Street Journal written by former executives Kiran Raj and John Roth.
In a statement, Bittrex disputed the SEC’s allegations about its business and said it had repeatedly asked the SEC over a period of five years which assets regulators believed were illegally offered on its platform. Regulators refused to do so, the company said.
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The SEC’s lawsuit is part of “a larger crusade to drive cryptocurrency out of the United States,” a Bittrex spokesman said. “The SEC’s actions will directly and substantially harm U.S. customers and U.S. employees.”
The SEC said Bittrex earned at least $1.3 billion in revenue from trading fees and other sources from 2017 through 2022.Seattle-based Bittrex Inc. has announced it plans to wind down American operations by the end of the month, citing the difficulty of working with U.S. regulators.
Bittrex has been under SEC investigation since 2017 and was told about the likely enforcement action in March, the Journal reported on Sunday. Attorneys for Bittrex Inc. and Bittrex Global didn’t respond to requests for comment. An attorney for Mr. Shihara declined to comment.
The SEC’s lawsuit says Bittrex, like many crypto exchanges, combined functions under one roof that are separated in traditional securities markets. The company served as an exchange, broker-dealer and clearinghouse at the same time.
On Wall Street, exchanges typically serve to match bids and offers submitted by brokers, which deal directly with customers’ funds and handle their orders. Clearinghouses handle the settlement of trades, meaning funds and ownership of securities is exchanged between buyer and seller.
The SEC says separating these core functions reduces conflicts of interests and enables safeguards such as keeping investors’ assets segregated from the broker’s or exchange’s finances. Each type of intermediary—stock exchange, broker and clearinghouse—faces prescriptive disclosure requirements, which the SEC enforces, designed to level the playing field between the business and the customer.
Customers of crypto platforms, meanwhile, are “at the whim of the crypto asset platform” to be truthful about how it operates, the SEC said.
“Today’s action, yet again, makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity,” SEC Chair Gary Gensler said in a statement. “Bittrex and issuers that it worked with knew the rules that applied to them but went to great lengths to evade them.”
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The SEC typically won’t tell crypto exchanges outright which digital assets are securities, counseling the industry to apply a legal test created by a 1946 Supreme Court case that addressed an investment in orange groves. Industry officials say the SEC has been unwilling to provide guidance that would put them on the right path and has chosen instead to score points through enforcement actions.
Bittrex employees complained internally about having to tell users about their decisions to remove an asset from the platform, the SEC said. In one email exchange cited by the SEC in its lawsuit, one of Bittrex’s three founders said his preferred way to deal with investors was: “go f*** yourself” or “track down your own damn investment or get a broker to do it for you.” The lawsuit doesn’t identify which founder allegedly made the statement.
The SEC says many issuers of digital assets should have treated the tokens as securities. Instead, the token sales were done in an unregulated manner, which allowed the developers to avoid giving investors detailed financial and risk disclosures.
Bittrex made more than 300 crypto tokens available for trading since 2014, the SEC said. Those tokens have included ones known as DASH, ALGO, OMG and TKN, the regulator said.
ALGO is a digital token that supports Algorand, a blockchain network designed to enable financial applications such as peer-to-peer payments. ALGO’s price declined slightly on Monday after the SEC filed its lawsuit, according to crypto data provider CoinGecko. An Algorand spokesman didn’t respond to a request seeking comment.
Mr. Shihara once told Bittrex employees “to roll the dice on the SEC investigation” if a token sale would earn his company enough money, the SEC said in its court complaint. Mr. Shihara, who served on Bittrex’s committee that reviewed listing decisions, received at least $130 million in bonuses and profit distributions from 2017 to 2020, the SEC said.
In another instance cited by the SEC, Mr. Shihara told a token issuer to remove terms that might stand out to regulators as hallmarks of an investment.
“Scrub the docs of investment related terms,” Mr. Shihara wrote in a May 2017 email, which also asked for a “memo from your legal team on why this isn’t a security.”
Write to Dave Michaels at dave.michaels@wsj.com
Regulators allege the company listed assets that required it to register and follow investor-protection rules
The Securities and Exchange Commission’s lawsuit accuses Bittrex of operating an illegal securities exchange.PHOTO: FARRAH SKEIKY FOR THE WALL STREET JOURNAL
By Dave Michaels
Updated April 17, 2023 3:24 pm ET
WASHINGTON—Securities regulators sued Bittrex, a crypto exchange that once ranked as the biggest U.S.-based platform for trading digital assets.
The Securities and Exchange Commission’s lawsuit, filed in Seattle federal court, accuses Bittrex Inc. of operating an illegal securities exchange, broker-dealer and clearinghouse. The lawsuit hinges on the claim that Bittrex listed digital assets that qualified as securities, which would have required the company to register with the SEC and follow its rules.
The SEC also sued Bittrex’s overseas platform, Bittrex Global GmbH, as well as former chief executive William Shihara, who ran the company until November 2019. Bittrex separated its U.S. and overseas operations in 2019, a couple of years after it ranked as the largest U.S.-based crypto exchange by trading volume, according to a December 2017 opinion article in The Wall Street Journal written by former executives Kiran Raj and John Roth.
In a statement, Bittrex disputed the SEC’s allegations about its business and said it had repeatedly asked the SEC over a period of five years which assets regulators believed were illegally offered on its platform. Regulators refused to do so, the company said.
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WSJ Crypto
Smart and accessible crypto market analysis for investors.
Subscribed
The SEC’s lawsuit is part of “a larger crusade to drive cryptocurrency out of the United States,” a Bittrex spokesman said. “The SEC’s actions will directly and substantially harm U.S. customers and U.S. employees.”
The SEC said Bittrex earned at least $1.3 billion in revenue from trading fees and other sources from 2017 through 2022.Seattle-based Bittrex Inc. has announced it plans to wind down American operations by the end of the month, citing the difficulty of working with U.S. regulators.
Bittrex has been under SEC investigation since 2017 and was told about the likely enforcement action in March, the Journal reported on Sunday. Attorneys for Bittrex Inc. and Bittrex Global didn’t respond to requests for comment. An attorney for Mr. Shihara declined to comment.
The SEC’s lawsuit says Bittrex, like many crypto exchanges, combined functions under one roof that are separated in traditional securities markets. The company served as an exchange, broker-dealer and clearinghouse at the same time.
On Wall Street, exchanges typically serve to match bids and offers submitted by brokers, which deal directly with customers’ funds and handle their orders. Clearinghouses handle the settlement of trades, meaning funds and ownership of securities is exchanged between buyer and seller.
The SEC says separating these core functions reduces conflicts of interests and enables safeguards such as keeping investors’ assets segregated from the broker’s or exchange’s finances. Each type of intermediary—stock exchange, broker and clearinghouse—faces prescriptive disclosure requirements, which the SEC enforces, designed to level the playing field between the business and the customer.
Customers of crypto platforms, meanwhile, are “at the whim of the crypto asset platform” to be truthful about how it operates, the SEC said.
“Today’s action, yet again, makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity,” SEC Chair Gary Gensler said in a statement. “Bittrex and issuers that it worked with knew the rules that applied to them but went to great lengths to evade them.”
Crypto’s Crash Has Been Swift but Largely Self-Contained. Here’s Why.
YOU MAY ALSO LIKE
Crypto’s Crash Has Been Swift but Largely Self-Contained. Here’s Why.Play video: Crypto’s Crash Has Been Swift but Largely Self-Contained. Here’s Why.
Illustration: Mallory Brangan
The SEC typically won’t tell crypto exchanges outright which digital assets are securities, counseling the industry to apply a legal test created by a 1946 Supreme Court case that addressed an investment in orange groves. Industry officials say the SEC has been unwilling to provide guidance that would put them on the right path and has chosen instead to score points through enforcement actions.
Bittrex employees complained internally about having to tell users about their decisions to remove an asset from the platform, the SEC said. In one email exchange cited by the SEC in its lawsuit, one of Bittrex’s three founders said his preferred way to deal with investors was: “go f*** yourself” or “track down your own damn investment or get a broker to do it for you.” The lawsuit doesn’t identify which founder allegedly made the statement.
The SEC says many issuers of digital assets should have treated the tokens as securities. Instead, the token sales were done in an unregulated manner, which allowed the developers to avoid giving investors detailed financial and risk disclosures.
Bittrex made more than 300 crypto tokens available for trading since 2014, the SEC said. Those tokens have included ones known as DASH, ALGO, OMG and TKN, the regulator said.
ALGO is a digital token that supports Algorand, a blockchain network designed to enable financial applications such as peer-to-peer payments. ALGO’s price declined slightly on Monday after the SEC filed its lawsuit, according to crypto data provider CoinGecko. An Algorand spokesman didn’t respond to a request seeking comment.
Mr. Shihara once told Bittrex employees “to roll the dice on the SEC investigation” if a token sale would earn his company enough money, the SEC said in its court complaint. Mr. Shihara, who served on Bittrex’s committee that reviewed listing decisions, received at least $130 million in bonuses and profit distributions from 2017 to 2020, the SEC said.
In another instance cited by the SEC, Mr. Shihara told a token issuer to remove terms that might stand out to regulators as hallmarks of an investment.
“Scrub the docs of investment related terms,” Mr. Shihara wrote in a May 2017 email, which also asked for a “memo from your legal team on why this isn’t a security.”
Write to Dave Michaels at dave.michaels@wsj.com
