SEC's Bittrex Lawsuit Says ALGO, DASH are Unregistered Securities

Decentralization doesn’t exempt a protocol or token from SEC oversight, the regulator suggested in a lawsuit filed against crypto exchange Bittrex on Monday.

SEC Chairman Gary Gensler is expected to double down on that point during an appearance before a Congressional subcommittee on Tuesday, according to a copy of his remarks.

Bittrex sold unregistered securities, according to the SEC. The alleged securities include DASH, one of the hundred largest tokens by market capitalization.

In a flurry of lawsuits this year, the SEC has alleged numerous tokens are unregistered securities. Most, however, were distributed via an Initial Coin Offering (ICO), the crypto equivalent of the stock market’s initial public offering. According to the SEC’s complaint, DASH was first distributed to network participants known as “miners.”

“I believe even relatively conservative cryptolawyers would’ve thought DASH is not a security,” crypto attorney Gabriel Shapiro wrote on Twitter. “Decentralization & user governance are a joke to this SEC.”

DASH fell almost 6% Monday.

DASH Price. Source: CoinGecko

In its lawsuit, the SEC also alleged Algorand’s ALGO, one of the 50-largest tokens by market capitalization, is a security.

Algorad Foundation

The Algorand Foundation and Algorand Inc. both support the Algorand blockchain, the SEC noted in the lawsuit. People who bought ALGO could “reasonably believe” they would profit from both entities’ effort to grow the blockchain, growth that would, in turn, drive demand for ALGO.

In short, Algorand is a “common enterprise” whose investors can expect profit based on others’ efforts, according to the SEC. That expectation of profit based on other peoples’ work is one of the key criteria that determines whether a particular asset is a security, according to US law.

“It’s clear the SEC thinks the foundation can be the ‘others’ upon which investors are relying for a reasonable expectation of profits,” Zach Rosenberg, principal at Degen Legal, wrote on Twitter.

The protocol-and-foundation arrangement is popular in the crypto industry. Immutable protocols and protocols governed by a distributed group of token holders often receive support from a foundation or a company run by the protocols’ founding team.

Exchange Registration

Bittrex should have registered as a broker, exchange, and a clearing agency, according to the lawsuit. The SEC also alleges Bittrex’s co-founder and former CEO helped the creators of soon-to-be-listed tokens “scrub” “problematic statements” from their social media accounts — statements that might lead a regulator to “investigate the crypto asset as the offering of a security.”

Gensler has previously said he believes most crypto tokens are securities. He intends to make that case before the House Committee on Financial Services Tuesday, according to a copy of his prepared testimony available on the committee’s website.

DeFi Mention

“Crypto intermediaries—whether they call themselves centralized or decentralized—often provide an amalgam of services that typically are separated from each other in the rest of the securities markets,” Gensler’s planned testimony reads. “It’s the law; it’s not a choice. Calling yourself a DeFi platform, for instance, is not an excuse to defy the securities laws.”

But crypto industry participants insist the SEC has not been acting in good faith, and point to the fact the SEC has declined to provide a viable path to registration or to list the tokens it believes to be securities.
Two weeks ago, Bittrex announced it would leave the U.S. market by April 30, citing the “current U.S. regulatory and economic environment.”