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Financial Services Law Insights and Observations

SEC charges crypto firm for failing to register and mitigate risk factors

Securities SEC Cryptocurrency Enforcement California Digital Assets Broker

Securities

On November 20, the SEC filed a complaint in the U.S. District Court of the Northern District of California against a crypto trading platform, which allows customers to buy and sell crypto assets through an online market, for allegedly acting as an unregistered securities exchange, broker, dealer, and clearing agency. The SEC is also claimed defendant’s business practices, internal controls, and recordkeeping were inadequate and presented additional risks to consumers, that would also be prohibited had defendant been properly registered with the commission. For instance, the SEC cited practices including commingling billions of dollars of consumers’ cash and crypto assets with defendant’s own crypto assets and cash, which defendant’s 2022 independent auditor identified as “a significant risk of loss."

Director of the SEC’s Division of Enforcement, Gurbir S. Grewal said, “[Defendant’s] choice of unlawful profits over investor protection is one we see far too often in this space, and today we’re both holding [defendant] accountable for its misconduct and sending a message to others to come into compliance.”

The SEC seeks to (i) permanently enjoin defendant from violating Section 5 and section 17A of the Exchange Act; (ii) permanently enjoin defendant from offering or selling securities through crypto asset staking programs; (iii) disgorge defendant’s allegedly illegal gains and pay prejudgment interest; and (iv) impose a civil money penalty.