SEC’s Move to Redefine Exchange and Trading Systems Sparks Concerns

SEC Chair Gary Gensler announced that the regulator is still very much focused on these changes at the US Treasury Market Conference. So far, these regulatory updates have faced a lot of criticism from the crypto industry. Meanwhile, the SEC won a partial legal victory in its case against Opporty International for conducting an unregistered ICO. Additionally, Swan Bitcoin filed a lawsuit against former employees for stealing code and launching a competing mining firm, Proton Management, in partnership with Tether.

SEC Reworks Exchange Definitions

The United States Securities and Exchange Commission (SEC) is still focused on pursuing changes to the definitions of “exchange” and other trading systems, according to SEC Chair Gary Gensler who spoke at the US Treasury Market Conference on Sept. 26. While Gensler mostly addressed issues related to the efficiency and resilience of the US Treasury bond market, these regulatory and definition changes have drawn a lot of attention and criticism from the digital asset space.

One of the SEC’s key moves to strengthen the Treasury market has been redefining “dealer” to include a wider range of market participants, like principal-trading firms that utilize algorithmic and high-frequency trading strategies. Although the changes were proposed in 2022 and adopted earlier this year, they were met with opposition from pro-crypto figures, who raised concerns about their impact on digital asset trading.

Other regulatory updates could present even more challenges, especially with regards to the definition of “exchange” and alternative trading systems. The SEC proposed in 2022 that platforms functioning as market makers for government securities will need to meet new registration requirements. 

This proposal could extend to other exchange platforms ,and has sparked many debates over its potential constitutional implications. When the SEC revived the proposal in 2023, it included provisions that were aimed specifically at decentralized finance (DeFi). Although Gensler did not specifically discuss crypto or DeFi in his Treasury conference remarks, he did later appear on CNBC where he addressed crypto regulation, and stated that the industry is sufficiently regulated under the existing laws. 

Registered alternative trading systems like Prometheum and tZero are exceptions in the digital asset space, being the first and only firms to receive special purpose broker-dealer status for digital asset securities. This status allows them to provide custody services for digital asset securities to both retail and institutional clients.

Court Sides with SEC in Opporty ICO Case

The SEC is not only focused on changing the definitions of trading systems, but it is also still involved in many legal battles against the crypto industry. The SEC recently secured a partial victory in its legal case against blockchain firm Opporty International and its owner, Sergii Grybniak, after accusing them of conducting a fraudulent initial coin offering (ICO).

In a memorandum on Sept. 24, US District Judge Eric Komitee determined that the SEC proved its claim that Opporty and Grybniak unlawfully sold unregistered securities in the US.

The SEC originally filed the lawsuit in January of 2020, and accused Opporty of offering unregistered digital asset securities through its ICO. Judge Komitee ruled that Opporty’s “OPP” tokens met the criteria of investment contracts under the federal securities laws, according to the Howey test, and therefore should have been registered with the SEC.

The SEC also argued that Opporty and Grybniak violated Section 5 of the Securities Act of 1933, which governs the registration and distribution of securities. Grybniak argued that the ICO did not require registration as the sale qualified under Reg D/S exemptions, which apply to transactions that don’t involve a public offering and limit sales to accredited investors or sales made outside the United States.

Judge Komitee acknowledged that Grybniak’s defense regarding the SEC’s Section 5 claim was very reasonable, as the SEC’s guidance on crypto offerings were vague, and left investors confused on how the Howey test would apply. However, the judge ultimately agreed with the SEC, and found that Opporty failed to meet the exemption requirements under Regulation S because the company engaged in direct selling efforts in the US.

SEC complaint against Opporty and Grybniak (Source: SEC)

The Opporty ICO was conducted between September of 2017 and October of 2018, and raised $600,000 from close to 200 investors, both domestic and international. The company marketed itself as a blockchain-based ecosystem that is designed to connect small businesses with their customers, primarily in the United States, which made it possible for businesses to list services and enter into agreements via smart contracts.

Swan Bitcoin Sues Ex-Employees

Other crypto companies are also engaged in legal battles, albeit not with the SEC. Bitcoin financial services firm Swan Bitcoin filed a lawsuit against several former employees from its mining division after accusing them of stealing proprietary software code, resigning, and using the stolen code to launch a competing mining company, Proton Management. The lawsuit was filed on Sept. 25, and alleges that the former employees convinced one of Swan’s key partners, stablecoin issuer Tether, to sever ties with Swan and collaborate with their new company instead.

Swan’s attorneys claim that the group planned to damage Swan’s market position by executing a plan called “rain and hellfire,” which involved taking control of Swan’s mining business and removing the company from its joint venture with Tether. The lawsuit names Michael Holmes, who is Swan’s former Head of Business Development, as the leader of Proton. Raphael Zagury, Swan’s former Chief Investment Officer and head of its mining division, is listed as Proton’s CEO.

List of conspirator names in Swan Bitcoin’s lawsuit

The court filing states that the former employees stole confidential business information and trade secrets essential to running a Bitcoin mining operation. Swan was reportedly blindsided by a series of resignations on Aug. 8 and 9, which was shortly before Tether notified the firm on Aug. 12 that it will be replaced by Proton in their mining funding agreement.

Swan and Tether initially partnered in May of 2024 to launch a managed mining service targeting institutional investors, with the goal of reaching 100 exahashes of computing power by 2026. However, by July, Swan CEO Cory Klippsten revealed that the firm might close its mining business because of revenue challenges. The court filing indicates that Swan even considered offloading its mining operations to Tether around this time.

Swan is seeking a permanent injunction to prevent Proton from further interfering with its mining business, as well as the return of stolen equipment and confidential materials. The firm is also asking for a jury trial and for damages to be determined during the trial.