On September 27, 2018, both the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) filed charges against Marshall Islands-based firm 1pool Ltd. (“1pool”) and its Austria-based CEO and owner, Patrick Brunner, for (i) failing to register as a security-based swaps dealer with the SEC, (ii) failing to register as a futures commission merchant (“FCM”) with the CFTC, (iii) failing to conduct its security-based swaps transactions on a registered national exchange and (iv) failing to comply with anti-money laundering laws.
Investors with 1pool could pay for their security-based swaps and commodities transactions only with bitcoin. However, while the SEC and CFTC charges are brought amidst the wave of “crypto-enforcement” that has been the hot topic as of late, the 1pool enforcements essentially boil down to plain old-fashioned securities and commodities violations. These charges could have been brought regardless of whether bitcoin or fiat cash was used by investors to fund the transactions.
The SEC alleges that 1pool solicited both US and non-US investors to buy and sell security-based swaps through their website. Investors could create an account, even from the US, merely by providing an email address and username and funding their account with bitcoin. The failure to obtain investor information allowed US investors to purchase and sell security-based swaps without necessarily “meeting the discretionary investment thresholds required by the federal securities law.” 1pool had none of the appropriate procedures in place to ensure compliance with anti-money laundering and “know your customer” rules and regulations.
The SEC also alleges that 1pool failed to properly register as a security-based swaps dealer and failed to conduct such transactions on a registered national exchange. 1pool advertised the security-based swaps as “contracts for difference” (“CFDs”), where 1pool acted as the counterparty on every CFD. Neither the CFDs nor 1pool were registered, and the transactions were not executed on a national exchange as is required for security-based swaps.
The requirements allegedly breached by 1pool are in place for all transactions involving securities-based swaps, not just those in the cryptocurrency world. The Director of SEC’s Fort Worth Regional Office, Shamoil Shipchandler, explained that “the SEC protects US investors across a variety of platforms, regardless of the type of currency used in their transactions. International companies that transact with US investors cannot circumvent compliance with the federal securities laws by using cryptocurrency.”
The same day, the CFTC filed a similar complaint alleging that 1pool illegally offered off-exchange, retail commodity transactions to US customers without being registered with the CFTC, while also failing to implement adequate anti-money laundering and related supervisory procedures as required under US commodities laws.
The CFTC further alleges that 1pool attempted to solicit and accept orders from non-eligible contract participants “for the purchase or sale of commodities on a leveraged or financed basis that do not result in actual delivery of the commodities to the customer” (“retail commodity transactions”) and acted as a counterparty to these transaction. 1pool was essentially acting as an FCM without registering as one.
Under commodities laws, FCMs must diligently supervise all activities of their officers, employees, and agents relating to their business as an FCM. The requirements allegedly breached by 1pool are in place in an effort to prevent money laundering, improper trading with US persons, and other illicit activity. As in the securities world, international companies that transact with US investors cannot circumvent compliance with the US commodities laws by using cryptocurrency.
Not surprisingly, the Federal Bureau of Investigation later reported it had seized the domain name for 1pool’s website due to the alleged money laundering and wire fraud violations.
While these SEC and CFTC enforcement actions against 1pool involved transactions funded with bitcoin, such funding with bitcoin was not one of the alleged violations. These charges emphasize the need for basic compliance with US federal securities and commodities laws for all regulated transactions, whether funded with cash, bitcoin or something else.