SEC Charges Bitcoin-Funded Securities Dealer and CEO

By: Richard B. Levin

The Securities and Exchange Commission (“SEC”) recently filed charges against an international securities dealer and its Austria-based CEO for allegedly violating the federal securities laws in connection with security-based swaps funded with bitcoins.  The SEC claims the defendants solicited investors from the United States and around the world to buy and sell security-based swaps, failed to transact security-based swaps on a registered national exchange, and failed to properly register as a security-based swaps dealer.  The case is of interest because it represents the first case in which the SEC has brought an action involving the sale of securities based swaps and digital assets. 

The case is also of interest because the SEC indicated that securities-based swaps must be traded on a registered national securities exchange, however, the SEC is required by Section 763 of Title VII the Dodd-Frank Wall Street Reform and Consumer Protection Act to adopt rules governing the trading of such products on swap execution facilities (“SEF”).  In July 2016, then SEC Chair Mary Jo While stated:

The Commission has taken action to address virtually all of the mandatory rulemaking provisions of the Dodd-Frank Act. The overarching objective of these rulemakings is to promote the long-term sustainability of the U.S. financial system. While the worst of the financial crisis is behind us, the Commission intensively continues its critical work to fulfill our obligation to protect investors, enhance market stability, and promote capital formation.

While the SEC proposed securities-based SEF rules in February 2011, the SEC has not acted on the proposed rules that would permit securities based swaps to be traded on a SEF.     

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