SEC Charges Bittrex With Operating an Unregistered Exchange, Broker, and Clearing Agency

On April 17, 2023, the U.S Securities and Exchange Commission charged crypto asset trading platform Bittrex, Inc. and its co-founder and former CEO William Shihara. with operating an unregistered national securities exchange, broker, and clearing agency. It also charged Bittrex, Inc.’s foreign affiliate, Bittrex Global GmbH, with failing to register as a national securities exchange in connection with its operation of a single shared order book along with Bittrex.  The complaint was filed in federal court in Seattle.

According to the SEC, since at least 2014, Bittrex has held itself out as a platform that facilitated buying and selling of cryptoassets that the SEC’s complaint alleges were offered and sold as securities. The SEC said that. from 2017 through 2022, Bittrex earned at least $1.3 billion in revenues from, among other things, transaction fees from investors, including U.S. investors, while servicing them as a broker, exchange, and clearing agency without registering any of these activities with the Commission.

One specific practice alleged by the SEC was that Bittrex and Shihara coordinated with issuers who sought to have their crypto asset made available for trading on Bittrex’s platform 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.  The complaint alleges:

When deciding whether to include an asset on the Bittrex Platform, Bittrex assessed whether the financial benefits of doing so outweighed the risk that the asset in question would be subject to scrutiny by regulators, including specifically the SEC. For example, in or around March 2017, Shihara told the other Bittrex co-founders with regards to a particular crypto asset: “the problem is that its going to be seen by the SEC as a security. im meeting with these guys face to face to get specifics on how much they want to raise, who they are raising it from, and what they expect the after market to be. its a big enough opportunity that we might want to roll the dice on the sec investigation. we have a couple of paths forward but one idea was to have them take a position in bittrex and own the risk of an SEC investigation with us.”

Along the same lines, the complaint alleges

To further its dual goals of making more crypto assets available on the Bittrex Platform and avoiding regulatory scrutiny, starting in at least May 2017, Bittrex routinely directed that crypto asset issuers “scrub” their offering and marketing materials of “investment-related terms,” including language that would “get unwanted attention from the SEC.” Bittrex regularly asked issuers to remove “problematic statements” from their marketing materials—statements indicating that the asset was marketed as a security—as a prerequisite for making the issuers’ crypto assets available for trading on the Bittrex Platform. Bittrex unofficially dubbed this practice the “problematic statement cleanup.”

The “problematic statement cleanup” was nearly always done after the initial offering of the crypto asset—i.e., after the crypto asset had already been offered and sold to investors. In other words, the issuers of the crypto assets had already marketed, offered, and sold the crypto assets to the investing public by using the very “problematic statements” that Bittrex recognized were “investment related terms” that indicated the assets could be securities. In requiring issuers to “scrub” their documents, Bittrex did not actually change the economic reality of those offers and sales, but rather simply attempted to remove or “scrub” any evidence of these public statements without changing the actual characteristics of the offering or asset even assuming the deletions were successful.

Another notable aspect of the complaint is that, while stating that, in order to prevail, the SEC need only establish that Bittrex transacted in a single cryptoasset security, the SEC set forth specific details regarding what it characterized as a non-exhaustive list of six examples of cryptoassets available for trading on the Bittrex platform that the SEC said were securities.  The six are DASH, ALGO, OMG, TKN, NGC and IHT.  So far, however, the SEC has not brought any charges against the issuers of these tokens.  This is reminiscent of when the SEC brought a case in July 2022 and identified nine other tokens as securities.

Bittrex Global issued a statement in response to the lawsuit that, among other things, stated:

The SEC has initiated these proceedings despite the fact that Bittrex Global has no U.S. customers, has never held itself out as doing business in the U.S. or with U.S. persons, and has taken pains to disclose to U.S. persons that they are not permitted to use its exchange. Bittrex U.S. — which operated in the U.S. until it announced in March 2023 that it was winding down operations citing regulatory uncertainty — was and is legally and operationally distinct from Bittrex Global. . . .

Bittrex Global was willing to work productively with the SEC — as we do with all regulators — to explain our position. It has become clear that the SEC is not interested in such discussions. As a result, Bittrex Global will instead make those explanations — which we anticipate will be compelling — to a court, as we vigorously defend these allegations in the U.S.