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Financial Services Law Insights and Observations

Texas State Securities Board halts cryptocurrency debit card investment scheme

State Issues State Regulator Cryptocurrency Securities

State Issues

On August 14, the Texas State Securities Board issued a cease and desist order against three South African companies and an officer of the companies (collectively, “defendants”) accused of violating the state’s securities act by engaging in an international cryptocurrency debit card scheme. The defendants allegedly solicited Texas residents to make investments that promised guaranteed gains based on the number of cardholders that eventually signed up for the cryptocurrency debit card. The cryptocurrency debit card was promoted as a prepaid Mastercard that would allow cardholders to use various types of stablecoins to avoid certain taxable events. However, the defendants allegedly intentionally failed to disclose the risks associated with the use of stablecoins (e.g. stablecoin transactions are not reversible and “a party sending stablecoins to an address accepts the risk that the party may lose access to, or any claim on, the stablecoins”), nor did they disclose that legislation and regulations may negatively impact the taxation of cryptocurrencies. Additionally, the order states that the defendants concealed business information about their relationships, contracts, compensation, and the use of the funds, and that because they are not registered as dealers or agents with the Texas State Securities Board, they cannot sell their investment products in Texas.

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