A trading platform settled SEC charges for facilitating the purchase and sale of digital asset securities without registering as a national securities exchange or operating pursuant to a registration exemption.
The SEC found that the platform operated as an exchange as defined under SEA Rule 3b-16 ("Definitions of terms used in Section 3(a)(1) of the Act") from July 2017 to November 2019, because it provided the ability for trade orders to "interact and execute" through the platform's website, order book and trading engine.
According to the Order, the platform wanted to take an "aggressive" approach to building market share and, despite putting in place parameters designed to determine whether a digital asset was a security and publicly communicating that the platform would not provide a trading market for digital assets that are securities, it allowed users to trade digital assets that might be considered securities under the test set out in SEC v. W. J. Howey Co. The Order further found that in 2018, the platform determined that it would continue to allow trading in digital assets it characterized as "medium risk" of being considered securities. As a result, the SEC concluded that the platform offered digital asset securities to its users to trade and operated as an unregistered exchange in violation of Section 5 ("Transactions on unregistered exchanges") of the Exchange Act.
To settle charges, the platform agreed to (i) cease and desist from future violations, (ii) pay $8,484,313 in disgorgement, plus $403,995 in prejudgment interest, and (iii) a $1.5 million civil money penalty.
In a statement on the matter, SEC Commissioner Hester M. Peirce criticized the agency's "enforcement-centric" approach to entities engaging with crypto assets. Ms. Peirce explained that while the platform could have attempted to register as a securities exchange or as a broker-dealer so that it could have operated an alternative trading system ("ATS"), given how slow the SEC and FINRA were to address crypto issues, it likely would have had to wait a substantial amount of time before being given permission to operate.
Ms. Peirce acknowledged the SEC's efforts to clarify the implications for broker-dealers, ATSs and exchanges engaging with crypto assets, including (i) the agency's joint statement with FINRA on broker-dealer custody of digital asset securities, (ii) agency staff's approval of a simplified process for ATSs to facilitate digital asset securities transactions and (iii) the agency's no-action relief (albeit time-limited and narrow in scope) for broker-dealers custodying digital asset securities. However, Ms. Peirce emphasized that such efforts are small steps, and more substantial steps are necessary. Ms. Peirce stated that if the platform subject to the enforcement matter or another crypto trading platform decides to register with the agency as an exchange or an ATS, then the SEC should clarify a number of issues, including:
- whether and how the platform can custody client assets;
- whether an adequate number of broker-dealers can navigate the registration process in order to make a liquid market;
- whether the platform can trade both non-securities and securities;
- how the platform and its customers can assess whether a certain digital asset is a security; and
- the mechanics of registering tokens sold as part of an investment contract as a class of equity security under the Exchange Act and how long they must be considered securities.
Primary Sources
- SEC Press Release: SEC Charges Poloniex for Operating Unregistered Digital Asset Exchange
- SEC Order: Poloniex, LLC
- SEC Statement, Hester Peirce: In the Matter of Poloniex, LLC
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