A Seattle cryptocurrency firm has become the latest poster child in the increasingly heated debate over how the controversial technology should be regulated.
On Monday, the U.S. Securities and Exchange Commission charged Bittrex and a former Amazon engineer who co-founded it with running an unregistered trading operation for securities based on cryptocurrency assets.
From 2017 to 2022, Bittrex made $1.3 billion acting as a broker, trading exchange and clearing house of crypto assets — roles for which the 9-year-old company never registered with the SEC, according to a 56-page complaint filed in federal court in Seattle.
William Shihara, who was Bittrex CEO from its founding in 2014 until he stepped down in 2019, earned at least $130 million in compensation, the SEC said.
The charges come just two weeks after Bittrex, once the nation’s largest exchange for digital coins and other crypto assets, said it would cease U.S. trading operations April 14. It also follows years of tension between Bittrex and regulators over the precise status of the crypto assets traded on its platform.
Bittrex declined to make any of its senior management available for comment. In a statement Monday, Bittrex denied that securities were ever offered or traded on its platform and warned the SEC action “put our country at a significant disadvantage in the development of blockchain technology, including uses far beyond cryptocurrency, in the future.”
That warning appeared to resonate across parts of Seattle’s tech community, where dozens of startups are using the blockchain technologies behind crypto assets to build a more decentralized internet known as Web 3.0.
“The overall sentiment from the community, especially from those that are focused in the Web 3.0 space, is just disappointment,” said Arry Yu, chair of the Cascadia Blockchain Council at the Washington Technology Industry Association.
The charges against Bittrex are the latest to hit the crypto industry, whose novelty and relative lack of regulation is widely blamed in problems ranging from the collapse last year of Sam Bankman-Fried’s FTX trading platform to the failures in March of banks heavily invested in crypto.
In the aftermath of the FTX scandal, SEC Chair Gary Gensler indicated that the federal government would push crypto trading platforms like Bittrex to comply with federal regulations intended to protect investors from fraud and incompetence, according to The Wall Street Journal.
But some experts say the government’s lack of clear guidance has created a state of “compliance by reacting” to the SEC’s latest enforcement action, said attorney Federica Pantana, a digital finance expert with Davidoff Hutcher & Citron who is representing a crypto miner.
Bittrex said Monday that “on multiple occasions, we asked [the SEC] to tell us what digital assets on our platform they viewed as securities, so that we could review and potentially delist them [and] they refused to do so.”
Some crypto-industry advocates believe federal regulators want to drive the cryptocurrency industry out of business or at least out of the United States.
Bittrex said its decision to end U.S. operations “due to continued regulatory uncertainty” won’t affect customers using its Bittrex Global platform.
In its complaint, the SEC said Bittrex put investors at risk by combining three operations regulators typical require to be separate.
These include broker-dealer, which represents buyers and sellers; the exchange, where assets are traded; and clearinghouse, which acts as a third-party intermediary between buyers and sellers.
The SEC says Bittrex knew some of the crypto assets on its platform might qualify as securities, which are heavily regulated, and tried to avoid drawing SEC attention to the assets.
Bittrex directed issuers of crypto assets to “scrub” their public statements of any “investment-related terms” or other “problematic statements” that might prompt the SEC to investigate assets as potential securities, according to the SEC complaint.
“Bittrex and issuers that it worked with knew the rules that applied to them but went to great lengths to evade them,” said the SEC’s Gensler.
According to the SEC, Shihara directed Bittrex’s “‘problematic statement cleanup’ campaign.”
On Monday, the company rejected any claims of wrongdoing and said “we look forward to vindicating our position in court.”
Last October, Bittrex was fined a record $24 million by U.S. authorities for helping clients in Cuba, Syria, Iran, Sudan and Russian-occupied Crimea to skirt U.S. sanctions and to trade more than $260 million in digital currencies from 2014 to 2017.
Bittrex was founded in 2014 by Shihara, Richie Lai and Rami Kawach, all former security engineers at Amazon who had also worked at Microsoft, according to the Bittrex website.
In February, Bittrex laid off 83 workers, or nearly a third of its workforce, after a cryptocurrency “market downturn triggered by multiple failures of the crypto ecosystem because an outright collapse,” according to an internal memo posted on Twitter.
Since then, cryptocurrency prices have recovered somewhat. Bitcoin, which had fallen below $16,000 in late 2022, was recently trading at nearly twice that.
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