On July 13, 2020, the U.S. Securities and Exchange Commission charged California-based Abra (a crypto investment app maker) and a related firm in the Philippines for offering and selling security-based swaps to retail investors without registration and for failing to transact those swaps on a registered national exchange. In a parallel action, the U.S. Commodity Futures Trading Commission issued an order filing and settling charges against both companies for entering into illegal off-exchange swaps in digital assets and foreign currency with U.S. and overseas customers and for registration violations.
In the SEC case, wwithout admitting or denying the findings in the order, Abra and related company Plutus Technologies Philippines Corp greed to a cease-and-desist order and to pay a combined penalty of $150,000. The CFTC Order requires the respondents to pay a $150,000 civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act (CEA), as charged.
According to the SEC’s order, Abra developed and owns an app that enabled users to bet on price movements of U.S.-listed equity securities. Using the app, individuals were able to enter into contracts that provide synthetic exposure to price movements of stocks and exchange-traded fund (ETF) shares trading in the U.S. through blockchain-based financial transactions with Abra or with Plutus Technologies. The order finds that Abra told users they could choose securities whose performance they wanted to mirror, and the value of their contract would go up or down the same amount as the price of the underlying security. The order further finds that these contracts were security-based swaps subject to U.S. securities laws.
The order finds that Abra marketed its app to retail investors, yet Abra took no steps to determine whether users who downloaded the app were “eligible contract participants” as defined by the securities laws. According to the order, Abra stopped offering contracts in February 2019, after conversations with SEC staff, but resumed the business in May 2019, this time attempting to limit the offers and sales to non-U.S. people. Although Abra moved certain operations outside the U.S., the order finds that its employees in California designed and marketed the swap contracts, and screened and approved users who would be allowed to buy the contracts. The order further finds that Abra’s U.S.-based employees effected thousands of stock and ETF purchases in the U.S. to hedge the contracts.
The SEC’s order finds that Abra and Plutus Technologies violated federal securities law provisions concerning unregistered offers and sales of security-based swaps and requiring that certain swap transactions occur on a registered national exchange. The CFTC’s order finds that, from approximately December 2017 to October 2019, the respondents accepted orders for and entered into thousands of digital asset and foreign currency-based contracts via the mobile app. These contracts, which constituted swaps under the CEA, enabled customers to enter into financial transactions, with the respondents acting as the counterparty, to gain exposure to price movements of over seventy-five digital assets. By entering into these contracts via their app, respondents violated Section 2(e) of the CEA, which makes it unlawful for any person, other than an eligible contract participant, to enter into a swap unless the swap is entered into on, or subject to the rules of, a board of trade designated as a contract market. Additionally, in soliciting and accepting orders for these contracts, the respondents illegally operated as an unregistered futures commission merchant.