SEC Launches Crypto Probe, and Why Circle Purchased Poloniex

On February 28, the Wall Street Journal, referring to anonymous sources, reported that the Securities and Exchange Commission (SEC) had sent dozens of new subpoenas and requests for information. Consultants and technology companies operating in the US and associated with the crypto industry became the addressees.

The representatives of several unnamed projects reported that the information requested usually includes a list of investors, e-mail addresses, marketing strategy reports, information on the organizational structure, the number of funds raised, the location of these funds, and information about the organizers and their location. And the SEC’s interest extends not only to consultants and issuers but also to some exchanges and investors.

A lawyer practicing in the crypto industry, who also asked to remain anonymous, spoke about the subpoena sent by the SEC to one of the projects in mid-January. According to him, the document consisted of 25 pages and was “hyper-detailed,” affecting every aspect of the token. Right, large financial institutions have the resources and procedures to work with such requests, but it is very problematic for a small start-up to provide all the required information. “It will be hell for any ordinary person to comply with this,” said the lawyer. He also noted, however, that the commission provides an alternative to scrupulous collections of papers, electronic messages, and letters as the recipient of the subpoena may personally appear at the SEC.

“This is the instrument they use to receive information about the world,” as another lawyer described the practice of sending subpoenas and requests from the SEC. The commission’s speaker declined to comment on the situation.

In a conversation with Coindesk, several lawyers reported that similar requests from the SEC had begun arriving last fall and, according to rough estimates, have already reached 80 in number. “They opened the hunting season; we have been warning our clients about this for several months,” said one of the lawyers. At the same time, other sources are counting subpoenas in the hundreds and mark a surge in the activity of the SEC in recent times.

According to Carol van Cliff, CEO of the Luminous blockchain solutions company, this can be simply bullying or all of the directed inquiries can be related to the same topic. “There were cases when the SEC sent out several subpoenas at a time. And they all belonged to the same topic,” said van Cliff, who previously worked as a lawyer in financial services.

According to her, a common thread can be traced in all of the subpoenas as many of the targeted ICOs have sold tokens that still do not have any applications since the blockchain platform they will be based on has not yet been developed. At the moment, it is unclear whether the “simple agreement on future tokens” (SAFT), introduced to the market last year, will have a practical implementation.

Also, Van Cliff notes that the SEC’s net is extremely wide and covers different areas of crypto space. It was thus that the commission’s participation was unexpectedly discovered in the deal on the acquisition of the Poloniex crypto exchange by the Circle financial company. On Monday, February 26, New York Times reporter Nathaniel Popper tweeted a photo of the slide from a “confidential Circle presentation.” As the leak shows, the SEC has notified Circle that it will not take enforcement action against Poloniex if Circle immediately takes all necessary steps to obtain approval of the exchange from the regulator. “Circle informed the SEC about the transaction and noted that after its conclusion we would begin the process registration with the SEC and FINRA of a new licensed brokerage/dealership enterprise. The SEC was very supportive of this approach and noted that it would not implement law enforcement actions in respect of past activities,” the authors of the document said. Such patronage may foreshow a new wave of ICOs, but already larger ones, the tokens of which will be legally promoted with the help of Circle–Poloniex.

Still, the chaotic multiplication of the ICOs remains one of the main targets of the SEC. “My colleagues and I appealed to the SEC enforcement department to continue to strictly monitor the market and apply coercive actions against those ICOs that violate the federal law on securities,” said the head of the SEC Jay Clayton during the Congressional hearing.

Among the projects that the SEC had already taken “law enforcement actions” against are the restaurant review service Munchee, Texas “cryptocurrency bank” AriseBank, three companies led by Patrick Johnson, which simultaneously announced the acquisition of crypto assets and were suspected of manipulating the market, as well as ICO PlexCorps, which became the first project exposed by the SEC’s cyber-division, formed in September.

According to Van Cliff, the current situation and the actions taken by the SEC show that “the enterprises that may not comply with the regulator’s requirements will need to create a proper balance of dialogue with the SEC and other government structures” because “the inability to build this dialog will lead to much greater damages.”

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