In what appears to be a coordinated effort, the Securities Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) both issued orders relating to Plutus Financial—doing business as Abra—and its Philippines-centered partner, Plutus Technologies Philippine Corporation (Plutus Tech). The July 13, 2020 orders found Abra and Plutus Tech had violated sections of the Securities Act of 1933 (Securities Act) , the Securities Exchange Act of 1934 (Exchange Act), and the Commodities Exchange Act. Both the SEC and CFTC assessed a $150,000 penalty against Abra and Plutus Tech—totaling $300,000—along with a cease and desist order. The order followed settlement offers from Abra and Plutus Tech, with both parties agreeing to the orders without admitting or denying the allegations or analyses therein.
The orders arose from Abra’s development and marketing of an app that allowed individuals access to synthetic exposure in digital and foreign currencies as well as U.S. stocks and ETFs. App users would set up a digital wallet, which would be funded via credit card, bank transfers, or digital-currency deposits. Those funds were then converted to Bitcoin and registered on the Bitcoin Blockchain. From there the customer would enter into a smart-contract on the blockchain to gain exposure to an asset, with Abra as the counterparty. These were advertised as “C3’s” or “Crypto-Collateralized Contracts.” When the contract ended, the settlement was registered on the blockchain, and the customer’s Bitcoin balance would change based on how the underlying reference asset performed. Abra borrowed Bitcoin to hedge against the exposure created by the contracts.
The diversity of the assets offered by Abra grew from foreign currencies, to virtual currencies, and finally to U.S. stocks and ETFs by early 2019. Shortly after contracts for stocks and ETFs were offered, Abra was given a warning by the SEC and stopped its operations. Not long after that, Abra’s Philippines-based partner, Plutus Tech, picked up the ball and started offering the same products to individuals overseas.
While the servers and advertisements used for Plutus Tech were outside of the United States, the SEC’s order was keen to point out that virtually all major functions, such as crafting contract language, and hedging and funding the transactions, were handled at Abra’s headquarters in California. Moreover, despite Plutus Tech attempting to limit its post-warning users to non-U.S. investors by screening users and coding its website to allow only foreign investors to see the swaps offered, the SEC found that Plutus Tech entered into contracts with around five U.S. investors.
The SEC and CFTC found these contracts constituted swaps, and that Abra and Plutus Tech violated the Securities Act, Exchange Act, and Commodities Exchange Act by marketing and effecting such transactions with non-eligible retail participants. Further, by soliciting these swaps, Abra and Plutus Tech acted as an unregistered futures commission merchant in violation of the Commodities Exchange Act. Both orders emphasized that Abra did not investigate whether or not those being offered swaps on their platform were eligible to participate in such swaps.
These orders display that transacting through cryptocurrencies and smart contracts on a blockchain or purporting do so offshore will not exempt a financial product from U.S. securities and commodities regulations. Both the SEC and CFTC looked at the substance of the products being offered and found they were swaps, despite using Bitcoin as the intermediary currency and a smart contract as the means of effecting the agreement. While new financial technology innovations have and will continue to change the mechanics of financial products and transactions, these orders display that novel products will be held to the same regulatory scrutiny as traditional ones.
The Securities Exchange Commission order can be found at https://www.sec.gov/litigation/admin/2020/33-10801.pdf. And the Commodities Futures Trading Commission order can be found at https://www.findknowdo.com/sites/default/files/news/attachments/2020/07/enfplutosfinancialorder071320-(1).pdf.
Norton Rose Fulbright has a useful database of FinTech materials for those who are interested in learning more about the subject.