[2018-09-27] SEC Charges Bitcoin-Funded Securities Dealer and CEO (1Broker)

[figmentofmyass]

i'm really saddened to see this. this was my favorite broker---awesome UI, super reliable trading engine, honorable and no KYC. i was still recommending them to folks fairly recently.

i always knew that sites like 1broker and simplefx were playing a dangerous game by offering CFDs funded in bitcoin with no registration/licensing as a securities or swap dealer and no KYC. it seems like the US government is on a warpath to set some chilling precedents in the bitcoin ecosystem.

it looks like both the SEC and CFTC are filing charges against 1broker:

SEC Charges Bitcoin-Funded Securities Dealer and CEO

Washington D.C., Sept. 27, 2018 — The Securities and Exchange Commission today filed charges against an international securities dealer and its Austria-based CEO for allegedly violating the federal securities laws in connection with security-based swaps funded with bitcoins.  

According to the SEC’s complaint, 1pool Ltd. a/k/a 1Broker, registered in the Republic of the Marshall Islands, and its CEO Patrick Brunner solicited investors from the United States and around the world to buy and sell security-based swaps.  Investors could open accounts by simply providing an email address and a user name – no additional information was required – and could only fund their account using bitcoins.  The SEC alleges that a Special Agent with the Federal Bureau of Investigation, acting in an undercover capacity, successfully purchased several security-based swaps on 1Broker’s platform from the U.S. despite not meeting the discretionary investment thresholds required by the federal securities laws.  The SEC also alleges that Brunner and 1Broker failed to transact its security-based swaps on a registered national exchange, and failed to properly register as a security-based swaps dealer.

“The SEC protects U.S. investors across a variety of platforms, regardless of the type of currency used in their transactions,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. “International companies that transact with U.S. investors cannot circumvent compliance with the federal securities laws by using cryptocurrency.”

The SEC’s complaint, filed in U.S. District Court for the District of Columbia, seeks permanent injunctions, disgorgement plus interest, and penalties.  In a parallel action, the Commodity Futures Trading Commission (CFTC) announced charges against 1Broker arising from similar conduct.  

The SEC’s investigation was conducted by David Hirsch and Morgan Ward Doran, and supervised by Scott Mascianica and Eric R. Werner of the SEC’s Fort Worth Regional Office.  The SEC’s litigation will be led by Chris Davis and supervised by B. David Fraser.  The Enforcement Division’s Cyber Unit assisted in the investigation.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Columbia, Department of Justice, Federal Bureau of Investigation, and the CFTC.

source: https://www.sec.gov/news/press-release/2018-218

[bbc.reporter]

That's what you see if you visit the site. Was 1broker based in the USA?

If it was based outside of America, then are we underestimating the power of the United States government? I have always thought that the cryptospace was unstoppable if faced versus the full might of the regulators. But not anymore.

Any government can take away our freedom to trade if they wanted to, I reckon.

[figmentofmyass]

That's what you see if you visit the site. Was 1broker based in the USA?

according to the SEC, the CEO is based in austria and the company is registered in the marshall islands. i really doubt they would keep servers in the USA, but that's just speculation.

If it was based outside of America, then are we underestimating the power of the United States government? I have always thought that the cryptospace was unstoppable if faced versus the full might of the regulators. But not anymore.

Any government can take away our freedom to trade if they wanted to, I reckon.

i've never underestimated them. it's hard to hide from uncle sam on the centralized domain name system and the legacy banking system. i had a lot of money of pokerstars/full tilt when the FBI shut them down in 2011. and after that, when i'd withdraw by check from other offshore poker sites, the feds kept freezing the bank accounts they were drawn on, so the checks kept bouncing.

then there was btc-e getting shut down last year. that was another eye-opener. stay safe out there......

[bbc.reporter]

If the United States government, which does not have jurisdiction in Austria, can seize a small exchange's domain name. Can it also seize the domains of larger exchanges based on foreign soil like Binance?

[illyiller]

The "world police" have arrived.

If the United States government, which does not have jurisdiction in Austria, can seize a small exchange's domain name. Can it also seize the domains of larger exchanges based on foreign soil like Binance?

Of course. Domains are quite easy to seize and the US does what it pleases. Any service that's "doing business" in the United States, the government considers it their jurisdiction. As mentioned above, just look at what happened to BTC-E.

[Slow death]

The "world police" have arrived.

If the United States government, which does not have jurisdiction in Austria, can seize a small exchange's domain name. Can it also seize the domains of larger exchanges based on foreign soil like Binance?

Of course. Domains are quite easy to seize and the US does what it pleases. Any service that's "doing business" in the United States, the government considers it their jurisdiction. As mentioned above, just look at what happened to BTC-E.

they simply became the owners of the world, in any corner of the world they put their nose and even do not want to know and respect the laws of other countries. The United States government holds in its hands a great power over this world. Something very dangerous.

Can it also seize the domains of larger exchanges based on foreign soil like Binance?

I believe, it is enough that the government of the United States should contact the government that registered the domain and then seize the domain, they are the powerful ones and only find difficulties in countries like russia, china, venezuela and korea of the south that are countries that try to confront them, but without many successes

[squatter]

Can it also seize the domains of larger exchanges based on foreign soil like Binance?

I believe, it is enough that the government of the United States should contact the government that registered the domain and then seize the domain, they are the powerful ones and only find difficulties in countries like russia, china, venezuela and korea of the south that are countries that try to confront them, but without many successes

It's even worse than that. With the .com TLD (as well as some others), the US government just needs to get a court order to seize the domain. These domains are all controlled by one company named VeriSign, and they have a very close relationship with the US government:

Bodog.com was registered with a Canadian registrar, a VeriSign subcontractor, but the United States shuttered the site without any intervention from Canadian authorities or companies.

Instead, the feds went straight to VeriSign. It's a powerful company deeply enmeshed in the backbone operations of the internet, including managing the .com infrastructure and operating root name servers. VeriSign has a cozy relationship with the federal government, and has long had a contract from the U.S. government to help manage the internet's "root file" that is key to having a unified internet name system.

In the case of BTC-e, the .com domain was seized by the US government, but interestingly the .nz mirror site was not. They refunded customers through the .nz domain.

[gentlemand]

they simply became the owners of the world, in any corner of the world they put their nose and even do not want to know and respect the laws of other countries. The United States government holds in its hands a great power over this world. Something very dangerous.

Why do you think Bitfinex got rid of Americans? As long as companies explicitly reject American customers they should be OK. 1broker didn't bother so they've arrived at this outcome.

[bbc.reporter]

@gentlemand. Would exchanges in American soil be the next targets? I reckon Poloniex might be given a free pass because of their cooperation to be compliant with the SEC after Circle bought it. But what about Bittrex? Bittrex expanded in Malta where regulators are cryptospace friendly. Might that be a move to escape American regulators if they need to?

[gentlemand]

@gentlemand. Would exchanges in American soil be the next targets? I reckon Poloniex might be given a free pass because of their cooperation to be compliant with the SEC after Circle bought it. But what about Bittrex? Bittrex expanded in Malta where regulators are cryptospace friendly. Might that be a move to escape American regulators if they need to?

It looks like regulators are slowly ironing out what they find acceptable and what isn't. ICOs are clearly toast in the main. Next up is a cast iron definition of which project is a security and which isn't. Once that's sorted I presume there'll be plenty left for Americans to play with.

When you have stuff like Bakkt coming along and futures, both of which are put together by long established finance players, it's clear it's not going anywhere in the US.

Gemini is off to Europe too. I presume Bittex and others want exposure to other markets.

[bbc.reporter]

It appears that founders or seed investors of exchanges who have the political connections can use that power to kill their competition starting in smaller exchanges.

Smaller American based exchanges should start forming their own lobby group, I reckon.

[dreamhouse]

Isn't this is true for all cryptocurrency exchanges outside US? They do allow US people to open accounts and trade. Will they be seized one day? Sounds scary...

[squatter]

they simply became the owners of the world, in any corner of the world they put their nose and even do not want to know and respect the laws of other countries. The United States government holds in its hands a great power over this world. Something very dangerous.

Why do you think Bitfinex got rid of Americans? As long as companies explicitly reject American customers they should be OK. 1broker didn't bother so they've arrived at this outcome.

That's what it seems like so far, but it's possible they're just been going after the lowest hanging fruit for now -- those that explicitly allow US customers while remaining unregistered as MSB, not doing KYC, etc.

It's really easy to trade on Bitfinex or Bitmex from the US with a VPN. That might be relevant in the future, since these cases often seem to hinge on whether agents can successfully "do business" with the defendants from the US. Take this case, for example:

The SEC alleges that a Special Agent with the Federal Bureau of Investigation, acting in an undercover capacity, successfully purchased several security-based swaps on 1Broker’s platform from the U.S. despite not meeting the discretionary investment thresholds required by the federal securities laws.

[deisik]

That's what you see if you visit the site. Was 1broker based in the USA?

If it was based outside of America, then are we underestimating the power of the United States government? I have always thought that the cryptospace was unstoppable if faced versus the full might of the regulators. But not anymore.

Any government can take away our freedom to trade if they wanted to, I reckon.

It is mostly irrelevant where it was based

BTC-e was hosted somewhere in Eastern Europe (Bulgaria, if I'm not mistaken) but that didn't prevent the FBI from seizing the exchange a little over a year ago and placing the same title page there. Basically, only a few places in the world can be said to get a free pass, i.e. countries like China, Russia, Iran, and their satellite states. But they have their own versions of FBI anyway, so it is all six of one and half a dozen of the other in the end. We need decentralized exchanges but not the ones that are only called such

In the case of BTC-e, the .com domain was seized by the US government, but interestingly the .nz mirror site was not. They refunded customers through the .nz domain.

They didn't refund anyone (in full), and they are slowly turning into scam right now

[figmentofmyass]

@gentlemand. Would exchanges in American soil be the next targets? I reckon Poloniex might be given a free pass because of their cooperation to be compliant with the SEC after Circle bought it. But what about Bittrex? Bittrex expanded in Malta where regulators are cryptospace friendly. Might that be a move to escape American regulators if they need to?

i think they're just expanding and splitting up their business. it's similar to what they did with upbit in korea---shared order book and commissions. but they're obviously still pushing into the USA market, adding real fiat markets (state by state) on their main exchange while enforcing full KYC.

i guess their legal position is that each partnership exchange operates under the regulatory framework where it's based/registered, in this case the EU and malta. supposedly that means the coin listing process will be easier and faster on the maltese exchange. i wonder whether they'll allow customers from the USA.

[gentlemand]

They didn't refund anyone (in full), and they are slowly turning into scam right now

Well, at least they came back and made a nominal effort for long enough to attempt to get the rest back. I certainly never trusted BTC-e. There was no way I'd extend any more to its zombie reincarnation.

[buwaytress]

Seems like a lot of people I am in contact with were also affected, brings me back to a decade ago and how the US government cracked down on e-gold (also it was irrelevant that they were based OUTSIDE of USA), causing me and others like me to lose all our funds (partial claims were entertained but to this day, most people effectively lost almost all their funds). This put me off a good several years from getting into Bitcoin - my fault for not understanding at first its decentralisation.

This could be the start of a pattern, finally states strike their initial blows against platforms we thought were immune. Keep your funds safe, people.

[gentlemand]

This could be the start of a pattern, finally states strike their initial blows against platforms we thought were immune. Keep your funds safe, people.

As long as there's a little fella in an office somewhere to shove a nightstick up, it's going to happen no matter where they are in the world if there's a whiff of America. E-gold's trajectory was fairly predictable.

Places like 1broker and BTC-e didn't give a shit about legal niceties. Other nastier people did.

[deisik]

This could be the start of a pattern, finally states strike their initial blows against platforms we thought were immune. Keep your funds safe, people.

As long as there's a little fella in an office somewhere to shove a nightstick up, it's going to happen no matter where they are in the world if there's a whiff of America. E-gold's trajectory was fairly predictable.

Places like 1broker and BTC-e didn't give a shit about legal niceties. Other nastier people did.

What about Bitfinex?

They seem to have had some tensions with CFTC in the past over what they incorrectly called currency swaps (or how they were actually called). The exchange had even been penalized, though I don't know if they paid the penalty, but since then they seem to have been below the radar of Uncle Sam and the US financial authorities like SEC or CFTC. Or we just don't know what's going on there and what's being deliberately kept under wraps. Then, when we finally find out, it may be already too late

[gentlemand]

What about Bitfinex?

They seem to have had some tensions with CFTC in the past over what they incorrectly called currency swaps (or how they were actually called). The exchange had even been penalized, though I don't know if they paid the penalty, but since then they seem to be below the radar of Uncle Same and the US financial authorities like SEC or CFTC. Or we just don't know what's going on there and what's being deliberately kept under wraps. Then, when we finally find out, it may already be too late

Since then they specifically excluded Americans. Since they're happily chugging on I guess it's safe to presume they're alright. I don't really get how or why though.

Tether is a much closer equivalent to e-gold than any exchange. Again I don't really get why that hasn't been nailed but perhaps it's because it spends its life sitting doing nothing on exchanges.