Over the summer of 2021, we have seen increased attention from the U.S. Securities and Exchange Commission (SEC) toward trading in cryptocurrency and other crypto assets. In particular, public comments by SEC Chair Gary Gensler have indicated that the SEC will soon take action against what he has described as the financial “Wild West.” On September 1, the form this action would take was clarified both by further comments from Gensler and by the filing of a complaint in the matter SEC v. BitConnect. As these comments and the complaint illustrate, the SEC’s concerns about the unregistered offering of securities and fraud on investors have led to a focus on crypto asset trading platforms and potential associated securities violations.
On September 1, Gensler appeared virtually before the European Parliament Committee on Economic and Monetary Affairs (Committee). Reminiscing about prior collaborations between the United States and Europe in addressing financial regulation, including the reformation of the swaps market Gensler had championed while chairman of the U.S. Commodity Futures Trading Commission, Gensler expressed hopes for future cooperation and highlighted three areas where changes in financial technology that might impact the ongoing discussions in Europe on developments in digital finance. Before opening the floor to questions, Gensler described predictive data analytics, crypto assets, and issuer disclosures specifically as “areas where technology and finance are evolving” and noted that they “are being used by startups, financial incumbents, and big tech firms alike to change the shape of finance.” In discussing crypto assets, in particular, Gensler noted that “this asset class has been rife with fraud, scams, and abuse” and remarked on the importance of regulating trading platforms, warning that “absent clear investor protection obligations” for such platforms, “the investing public is left vulnerable.”
Gensler expanded on his focus on the regulation of crypto asset trading platforms in an interview with the Financial Times the same day. In that interview, he reiterated his concern regarding the lack of investor protection on cryptocurrency platforms, describing such protections as “really sparse.” Gensler recommended that cryptocurrency trading platforms, despite their comparatively decentralized nature, register with the SEC on the grounds that many crypto assets constituted securities. In particular, he cautioned the industry that “there are a lot of platforms that are in operation today that would do better engaging and instead there is a bit of … begging for forgiveness rather than asking for permission.”  Given the lack of protections for investors on such platforms and the prominent role the platforms play in crypto asset activity, Gensler made it clear that cryptocurrency platforms, in particular, are currently a focus of the SEC.
This focus can be seen more concretely manifested in the September 1st complaint the SEC filed in the Southern District of New York against BitConnect and its founder, among others. The complaint alleges that BitConnect “launched a purported digital asset trading platform” in January 2017, on which it represented that “users could buy, sell, and trade” a digital token unique to BitConnect “for Bitcoin and vice versa” directly with other token holders “in peer-to-peer transactions.” The platform also provided users “the opportunity to earn daily interest payments” as part of a “Lending Program” by “lending” these digital tokens, purchased with bitcoin, back to BitConnect itself, “which, in turn, would purportedly invest these proceeds into the volatility of Bitcoin.” Following cease and desist orders from the Texas State Securities Board and the North Carolina Secretary of State Securities Division, the Lending Program shut down abruptly in January 2018, with the digital tokens held by investors “losing 92% of [their] purported value.”
Consistent with Gensler’s contemporary statements, the SEC’s complaint focuses on the transactions that composed the Lending Program, claiming that they “were investment contracts and, therefore, securities under the federal securities laws.” Elaborating further, the SEC detailed the respective roles played by the investors and BitConnect, noting that “an investment into the Lending Program was an investment of money into a common enterprise from which investors had a reasonable expectation of profit based upon the efforts of others,” and that “investors had no control over the success or failure of their Lending Program investment and could take no steps that would determine the fate of their investments.” By contrast, “BitConnect accepted consideration in the form of Bitcoin in exchange for investment into the Lending Program,” and “BitConnect marketed and promoted the Lending Program as paying investors profits based solely upon BitConnect’s entrepreneurial and managerial efforts.” Noting both that “an issuer of securities, such as BitConnect, register[s] offers and sales of those securities with the Commission when they offer and sell securities to the public” and that no such registration was filed, the SEC argued that the defendants thus conducted an “unregistered offering and sale of securities in the form of investments in BitConnect’s purported ‘Lending Program,’ that ultimately succeeded in obtaining more than 325,000 Bitcoin, or approximately $2 billion, from investors worldwide.”
In addition to providing a concrete application of the SEC’s current approach to crypto asset trading platforms and basis for requiring them to register with the SEC, the BitConnect complaint offers further insight into the sort of alleged abuses and dangers that Gensler alluded to in his Committee address. Specifically, the complaint alleges that BitConnect misrepresented the way in which the investors assets would generate profits and that, rather than operating as advertised, BitConnect and its founder “diverted the vast majority of investors’ funds to digital wallet addresses they controlled,” including three accounts in Slovenia from which a portion of the funds were later stolen when the accounts were hacked. Combined with the SEC’s description of the process by which BitConnect paid promoters to refer investors to the Lending Program — which the SEC illustrates with a pyramid graphic — and relying extensively on various statements made by BitConnect and its founder, the SEC alleges a detailed fraud by which “any investor who had not cashed out before” the cessation of the Lending Program in January 2018 “lost all or nearly all of his or her funds.”
The BitConnect case offers the SEC a vehicle by which to advance its position on registration requirements for crypto asset trading platforms, while highlighting and targeting the types of fraud, abuse, and misrepresentations that it has opined make such assets more dangerous for investors. Given these statements by Gensler, in the coming months, it is likely that the BitConnect complaint will be followed by additional complaints from the SEC that combine allegations of substantial securities violations with the argument that certain crypto asset trading platforms have offered unregistered securities for sale. In the meantime, industry members, investors, and other interested parties should continue to track further guidance and comments from the SEC on these issues.
 Gary Gensler, “Remarks Before the Aspen Security Forum,” Aug. 3, 2021 (available at https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03). See also Gary Gensler, “Testimony Before the Subcommittee on Financial Services and General Government, U.S. House Appropriations Committee,” May 26, 2021 (available at https://www.sec.gov/news/testimony/gensler-2021-05-26).
 SEC v. BitConnect, et al., 1:21-cv-07349.
 For further reading, see, e.g., “The European Commission and the CFTC reach a Common Path Forward on Derivatives,” CFTC Release Number 6640-13, July 11, 2013 (available at https://www.cftc.gov/PressRoom/PressReleases/6640-13).
 For further reading, see, e.g., “Digital Finance Package: Commission sets out new, ambitious approach to encourage responsible innovation to benefit consumers and businesses,” IP/20/1684, Sept. 24, 2020 (available at https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1684).
 Gary Gensler, “Remarks before the European Parliament Committee on Economic and Monetary Affairs,” Sept. 1, 2021 (available at https://www.sec.gov/news/speech/gensler-remarks-european-parliament-090121?utm_medium=email&utm_source=govdelivery#_ftn2).
 See Kiran Stacey, “Crypto platforms need regulation to survive, says SEC boss,” Financial Times, Sept. 1, 2021 (available at https://www.ft.domicontentifb126d79-2e60-4002-8aba-b08887foa609).
 SeeSEC v. BitConnect, et al., 1:21-cv-07349, Doc. 1.
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