In what may be the first of many, the Securities and Exchange Commission has announced charges against Poloniex for operating an unregistered digital asset exchange. Poloniex has settled with the SEC by agreeing to pay a $10.4 million penalty.
Poloniex settled without admitting or denying the SEC’s findings and agreed to the entry of a cease-and-desist order and agreed to pay disgorgement of $8,484,313, prejudgment interest of $403,995, and a civil penalty of $1.5 million for a total of $10,388,309.
The SEC’s order also establishes a Fair Fund for the benefit of any affiliated investors.
Filed today, the SEC’s order claims that from July 2017 through November 2019, when Poloniex sold its platform, Poloniex operated a trading platform that facilitated buying and selling digital assets, including digital assets that were investment contracts and therefore securities.
The SEC claims that the Poloniex trading platform met the criteria of an “exchange” as defined by the securities laws because the trading platform provided the non-discretionary means for trade orders to interact and execute through the combined use of the Poloniex website, an order book, and the Poloniex trading engine.
The SEC’s order also claims that notwithstanding its operation of the Poloniex trading platform, which was available to U.S. investors, Poloniex did not register as a national securities exchange nor did it operate pursuant to an exemption from registration at any time, and its failure to do so was a violation of Section 5 of the Exchange Act.
The SEC’s order also alleges that in or around August 2017, Poloniex employees stated internally that they wanted Poloniex to be “aggressive” in making available for trading new digital assets on the Poloniex trading platform, including digital assets that might be considered securities under the Howey test, in an effort to increase market share.
Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit, stated:
“Poloniex chose increased profits over compliance with the federal securities laws by including digital asset securities on its unregistered exchange. Poloniex attempted to circumvent the SEC’s regulatory regime, which applies to any marketplace for bringing together buyers and sellers of securities regardless of the applied technology.”
Current SEC Chairman Gary Gensler has regularly stated that the digital asset industry falls short when it comes to investor protection. In recent comments, Gensler has said that crypto exchanges are key to providing greater investor protection in the sector. It appears that the SEC enforcement division may take a very broad application of digital securities which may portend future enforcement actions targeting similar platforms.
Poloniex, at one point owned by Circle, was sold again in November 2019.
SEC v. Poloniex 8.9.2021 34-92607