Jake Chervinsky Profile picture
Sep 11, 2018 22 tweets 6 min read Twitter logo Read on Twitter
0.0/ A lot of #crypto news today from the securities enforcement world:

- DOJ goes to trial on ICO-related securities fraud charges
- SEC charges broker-dealer & hedge fund with securities violations
- FINRA charges broker with fraud & dealing unregistered securities

Thread.
1.0/ Let's start with DOJ. Today's news relates to a federal criminal case in the Eastern District of New York: United States v. Maksim Zaslavskiy.

Zaslavskiy was charged in November 2017 on three counts of securities fraud in connection with two ICOs: "REcoin" and "DRC."
1.1/ DOJ says Zaslavskiy lied to investors when he sold these ICOs.

According to the indictment, he told investors that both coins were backed by real world assets: he allegedly claimed REcoin was backed by real estate & DRC was backed by diamonds.
1.2/ In February, Zaslavskiy moved to dismiss the case, arguing that:

- he didn't commit securities fraud because REcoin & DRC aren't securities
- the securities laws are unconstitutionally vague because an ordinary person wouldn't have known his alleged conduct was illegal
1.3/ Today, the court denied Zaslavskiy's motion.

The judge ruled that, assuming all of DOJ's allegations are true, REcoin & DRC are securities & the laws are not so vague as to be unconstitutional.

This doesn't mean Zaslavskiy is guilty, it just means he will go to trial.
1.4/ The ruling is worth a read, but doesn't say anything too surprising:

- the federal securities laws apply to ICOs
- ICO tokens could qualify as securities under the Howey test
- making money by lying to investors could qualify as securities fraud
scribd.com/document/38835…
1.5/ The ruling likely won't have much impact outside of Zaslavskiy's case.

The reasoning may be persuasive, but other judges are free to ignore it if they disagree. Plus, it doesn't say "all ICOs are securities." It's limited to the facts of this case & may not apply otherwise.
1.6/ The ruling isn't even conclusive for REcoin & DRC. It just says that the indictment isn't so deficient that it should be dismissed.

A jury of twelve regular people will get to make the final decision, and they could easily decide that these ICOs aren't securities after all.
1.7/ One interesting point: the ruling doesn't *once* mention the SEC's statement about the Howey test & ICOs. Yeah, not one word about decentralization.

As I've said before, the SEC doesn't make the law. This is a good reminder that the SEC's interpretation is far from certain.
2.0/ Speaking of the SEC, they announced two cases today, charging:

- Crypto Asset Management ("CAM") & its owner with fraud & operating an unregistered investment company
- TokenLot & its owners with operating an unregistered broker-dealer
2.1/ Both cases had already settled before the SEC announced them.

This is typical for US government investigations. They can go on for months or years quietly & won't be announced until a resolution has been reached.

Imagine how many others are going through this process now.
2.2/ I'll spare you my recitation of the details of each case. If you're interested in learning more, take a look at the full orders:

- CAM (sec.gov/litigation/adm…)
- TokenLot (sec.gov/litigation/adm…)

These will also give you a good sense for how SEC investigations unfold.
2.3/ A couple interesting points here.

First, note that a company can violate the federal securities laws & still keep doing business (if it cooperates with the SEC, anyway).

CAM has to pay a $200k fine, but it gets to keep operating now that it's in compliance with the law.
2.4/ I've mentioned this before in the context of @Ripple & the possibility that the SEC is currently investigating potential violations related to #XRP.

It's possible to deal with securities violations without going bankrupt or to jail.
2.5/ Second, TokenLot is the first crypto company that the SEC has sanctioned for a purely regulatory violation (I'm pretty sure).

In other words, unlike all the other SEC crypto cases, nobody at TokenLot committed overt fraud. The company simply failed to register as required.
2.6/ This signals the start of a new chapter for enforcement in crypto.

The SEC is no longer focusing exclusively on obvious ponzis & scammers. They've expanded their scope to people who, despite good intentions, fail to comply with the securities laws due to negligence alone.
3.0/ Finally, let's touch on the Financial Industry Regulatory Authority ("FINRA"), which announced today that it charged a broker with fraud and unlawful distribution of unregistered securities.
3.1/ FINRA may be a new acronym for some people on #cryptotwitter.

It's a little different than the other regulators we often discuss. It's not technically part of the government: it's a "self-regulatory organization" authorized by Congress to govern the broker-dealer industry.
3.2/ As for the disciplinary action that FINRA announced today, it's a fairly straightforward story of a broker who allegedly launched an ICO, lied about it, and then sold it to investors anyway.

If you want to learn more, read here: (finra.org/newsroom/2018/…)
3.3/ What's most interesting is that FINRA has never charged a case involving crypto before.

Until now, the most active regulators in the space have been the SEC, DOJ, & FinCEN, but there are *so* many others who haven't jumped in yet.

I'm betting FINRA is the first of many.
4.0/ In conclusion, today feels like a big step forward in the government's efforts to clean up crypto. The pace is picking up & I expect we'll start seeing announcements like these more often.

Soon enough, the market caps of the coins at issue will get a lot bigger.
4.1/ To clarify, when I say "the market caps of the coins at issue will get bigger," I mean the SEC & other regulators will likely work their way up from smaller coins to larger ones.

This is standard: they start with the low-hanging fruit and build toward the bigger players.

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More from @jchervinsky

Sep 26, 2018
0/ A quick summary of today's ruling in the My Big Coin case.

In short, a federal court says *all* digital currencies are commodities & the CFTC has jurisdiction to prosecute fraud & manipulation in crypto. In my view, the ruling is deeply flawed.

Thread.nytimes.com/reuters/2018/0…
1/ Background:

According to the CFTC, the defendants sold a crypto called "My Big Coin" by falsely claiming it was backed by gold (it wasn't).

They also pretended it was actively traded on exchanges (nope) & made up arbitrary prices to raise $6 million from defrauded investors.
2/ The CFTC filed a lawsuit alleging violations of the anti-fraud & anti-manipulation provisions of the Commodity Exchange Act ("CEA").

The defendants filed a motion to dismiss arguing the CEA doesn't apply because My Big Coin isn't a commodity, so the CFTC has no jurisdiction.
Read 16 tweets
Sep 20, 2018
0.0/ ETF FAQ.

My answers to some common questions about the SEC & the approval process for #bitcoin & #crypto ETFs. If you have a question I didn't address, feel free to ask here & I'll add on.

Thread.
1.0/ Q: "Who decides whether to approve or deny an ETF?"

The initial decision is made by SEC staff in the Division of Trading & Markets. If the staff denies an ETF proposal, the ETF sponsor can file an appeal, which will be decided by all of the SEC Commissioners.
2.0/ Q: "What's the process & timeline for the SEC to decide on an ETF?"

When a proposal is filed, the SEC publishes it in the Federal Register (the government's official journal) & solicits comments from the public. It then has 45 days to approve, deny, or delay a decision.
Read 30 tweets
Sep 5, 2018
0/ A few thoughts on @ShapeShift_io's decision to start collecting users' personal information through a mandatory membership program.

In short, this is how regulators silently invade crypto.

Thread.
1/ Historically, ShapeShift has enabled users to convert between a variety of digital assets with total anonymity.

The service reflected the principles of its CEO, @ErikVoorhees, a true bitcoiner who speaks passionately about financial privacy & separating money from state.
2/ The thing is, the US government doesn't exactly agree with Erik's point of view.

Modern enforcement agencies rely heavily on financial surveillance. The concept of anonymous crypto exchanges & transactions is a genuine nightmare for regulators & investigators.
Read 18 tweets
Aug 23, 2018
0/ The SEC killed *all* of the pending derivative-backed #bitcoin ETFs today. Why did they do it, and what does it mean?

Thread.

1/ All eyes were on the SEC this week, as the final deadline to approve or reject the two ProShares bitcoin ETFs was tomorrow, August 23.

Most of us on #cryptotwitter were expecting the ETFs to be rejected.

2/ But we weren't expecting the SEC to also reject *seven* other derivative-backed ETFs proposed by GraniteShares & Direxion. Those ETFs weren't due for final decisions until September 15 and 21 respectively.

The only ETF left now is the VanEck/SolidX commodity-backed offering.
Read 11 tweets
Aug 17, 2018
0/ The SEC's final deadline to approve or deny the two ProShares Bitcoin ETFs is next Thursday, August 23 (sec.gov/rules/sro/nyse…). My thoughts on two questions:

- How will the SEC make its decision?
- Would these ETFs even be good for bitcoin?

Thread.
1/ In December 2017, the NYSE Arca exchange filed a proposal with the SEC to list and trade two ETFs issued by ProShares:

- ProShares Bitcoin ETF
- ProShares Bitcoin Short ETF

Both would use derivatives (futures, options, and swaps) to track bitcoin's daily price movements.
2/ These ETFs are important: they're the first ones that the SEC will approve or deny in 2018 & will set the stage for others in coming months.

Of course, nobody knows what the SEC will decide, but we can use their recent statements to figure out what factors they'll consider.
Read 17 tweets
Aug 14, 2018
0/ Let's talk about @Ripple litigation & the slow journey toward answering the question: "is #XRP a security?"

Before you ask, I don't plan to discuss my own opinion on this issue. I'd rather leave that to the courts, as I'll explain here.

Thread.
1/ Ripple is currently defending four cases in California courts:

- Two state cases in San Mateo County, brought by plaintiffs Zakinov & Oconer
- Two federal cases in the Northern District of California, brought by Coffey & Greenwald

All four cases are securities class actions.
2/ The plaintiffs allege basically the same thing: XRP is a security and Ripple violated state & federal law by failing to register it before offering, promoting, and selling it to retail investors.

If you want more details, read the Zakinov complaint:
coindesk.com/another-invest…
Read 19 tweets

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