SEC Fraudulent Digital Asset Transactions; CFPB Tech Sprints


This summary covers the last two weeks which includes news about continued enforcement actions by the U.S. Securities and Exchange Commission (“SEC”) involving fraudulent digital asset transactions, dismissal of a securities fraud lawsuit against a Chinese tech company accused of misleading U.S. investors about its customer rewards program, and the Consumer Finance Protection Bureau’s (“CFPB”) embrace of Tech Sprints as a means to spur regulatory innovation.

Whack-A-Mole: SEC Sues ICOBox over ICO Launch and for Acting as an Unregistered Broker in Digital Assets Transactions Totaling $650 Million

The SEC shows no signs of scaling back its enforcement activities relating to initial coin offerings (“ICOs”) and other digital asset offerings. This week the SEC filed suit in federal court against a California based digital asset company, ICOBox and its founder Nikolay Evdokimov, for allegedly selling over $14.5 million of ICOBox’s own digital tokens and for acting as an unregistered broker for other digital asset offerings. The business model of ICOBox was selling a digital asset that would give the owner of the token the right to swap these tokens for that of a token of an ICO that ICObox underwrote, or as they would say, “incubate.” The SEC alleges ICOBox sold its own unregistered securities to over 2,000 investors, and that the defendants made fraudulent representations in connection with the sale of those securities. The SEC also alleges ICOBox failed to register with the SEC as a broker-dealer and that it acted as one by facilitating the sale of digital assets that are securities, including raising more than $650 million for dozens of their clients.

The ICOBox matter is newsworthy for several reasons, not the least of which is the allegation that ICOBox was acting as an unregistered broker-dealer for other coin issuers in addition to selling its own coins under false pretenses. The SEC following through on its prior statements that the agency planned to take action against persons who have helped to facilitate ICOs even if those persons that are not issuers of the securities. This case follows other SEC enforcement action against firms and individuals that acted as unregistered broker-dealers in the sale of digital assets that are securities, a number of which have been discussed in previous Bitblog posts. The ICOBox matter is also noteworthy in that it explicitly makes reference to the DAO Report in that ICOBox sold tokens after the report was issued [1]. This could be interpreted as a statement from the SEC that they are not planning to take enforcement action against issuers, such as Ethereum (ETH), that sold only prior to the DAO Report which was issued in June 2017.

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SEC Charges Attorney with Issuing Legal Opinion in Case with Parallels to Token Sales

The SEC brought charges, along with a related criminal complaint from the U.S. Justice Department, alleging that attorney Jan D. Atlas improperly issued a legal opinion stating that notes issued by a company called 1 Global Securities were not securities. The SEC charges that this legal opinion was intentionally faulty and was done to increase the sale price of the notes. The charges against Mr. Atlas are a reminder to the FinTech community that the Chairman of the SEC has said the agency planned to pursue the gatekeepers that play a role in the offering of digital assets that are securities in a manner that violates the securities laws [2]. The case serves as a warning to lawyers issuing legal opinions stating that ICO tokens of one kind or another are not securities, particularly in light of the fact that the SEC has repeatedly noted that whether a digital asset is a security depends on the facts and circumstances and the SEC Division of Enforcement gets to make the first determination of whether a digital asset is a security. To allow lawyers who have issued opinions related to ICOs sleep a bit at night, Mr. Atlas’s involvement extended far beyond that of your typical ICO lawyer as he personally made a commission on the Note sales totaling $627,000 and was involved directly in the token sales and thus may have acted as an unregistered broker-dealer by virtue of receiving transaction related compensation which is a key hallmark of broker-dealer activity.

“Crypto Advisers” Busted for Using Ethereum in Simple Shakedown [3]

Last week the Federal Bureau of Investigations (“FBI”) arrested Steven Nerayoff and Michael Hlady for an extortion scheme where they threatened to destroy a cryptocurrency startup company if they were not paid millions of dollars in the cryptocurrency Ether (ETH). “When you peel back the layers of this case, an age-old extortion scheme is revealed with a modern day twist,” stated FBI Assistant Director-in-Charge Sweeney. One of the intimidation tactics the pair used was claiming that Hlady had been part of any number of clandestine intelligence and military organizations ranging from the Irish Republican Army to the Central Intelligence Agency to the FBI and that he had, “taken down,” a head of state. One takeaway from this case is that the decentralized nature of crypto assets and the purported anonymity provided to transacting parties make crypto firms an appealing target for criminals. Companies in the crypto or blockchain space and startups in particular need to be extra vigilant of criminals trying to take advantage of them. The informal and supposedly “trustless” dynamics of the crypto community makes them easy bait for crooks.

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Chinese Tech Company Xunlei Limited Escapes Putative Class Action in New York

Chinese technology firm Xunlei Limited obtained dismissal of a putative shareholder class action suit in federal court in New York. The plaintiffs had alleged that Xunlei and its CEO had violated U.S. securities laws because Xunlei’s cryptocurrency rewards program functioned like an initial coin offering (“ICO”) and Xunlei had failed to disclose that its program ran afoul of Chinese law. The rewards program stemmed from Xunlei’s remote storage device, known as OneThing Cloud. OneThing users were given access to the OneCoin Rewards Program, which allowed them to use excess computer data storage and bandwidth to mine the OneCoin cryptocurrency. The Plaintiffs focused on negative reviews of the rewards program and alleged that Xunlei did not disclose its unlawful status to American investors, but the U.S. District Court for the Southern District of New York dismissed the case for failure to state a claim. After analyzing Chinese law on the topic of ICOs and fundraising, the court concluded Xunlei’s rewards program did not, in fact, contradict Chinese law even though Xunlei launched OneThing Cloud the same month that the Chinese government banned ICOs. The court thus held that the plaintiffs had not alleged actionable fraudulent statements or omissions.

The Court’s order can be found here.

The CFPB Calls for “Tech Sprints” to Encourage Regulatory Innovation and Collaboration in Consumer Finance

The CFPB invited public comments on how it can use what are known as “Tech Sprints”to, “encourage regulatory innovation and collaborate with stakeholders in developing viable solutions to regulatory compliance challenges.” In its request for information, the CFPB noted, “[t]echnology plays an increasingly critical role in financial regulatory compliance,” and that “technology is used to assess and address compliance risk.” The CFPB further noted that evolving technology in the credit markets may enhance access to credit, but it may also prevent financial institutions and regulators from identifying and controlling risk.

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To help keep up with the transformative impact of technology on consumer finance, the CFPB said it was, “exploring Tech Sprints as a model for collaborative innovation.” According to the CFPB’s request for information, tech sprints gathers stakeholders and regulators to work together on specific regulatory compliance or market problems assigned by the regulator. The teams work for several days to produce actionable ideas, write computer code, and present their solutions to a panel of judges. A few topics the Bureau hopes to explore in these Tech Sprints include the use of cloud computing, machine automated compliance and other tech measures as a means to reduce “unwarranted regulatory compliance burdens.”

The CFPB’s request for information can be found here.


[1] Securities Exchange Act of 1934

[2] Statement on Cryptocurrencies and Initial Coin Offerings

[3] Two Arrested for Extortion of Statrup Cryptocurrency Company



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