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SEC Alleges FinTech and ‘Market Makers’ Firms Manipulated Crypto Market Under Token Scheme

The United States Securities and Exchange Commission, or SEC, has announced charges against Hydrogen Technology Corporation and its market marker Moonwalkers Trading Limited for allegedly carrying out a scheme to manipulate the trading volume and price of Hydro tokens.

In a September 28 announcement, the SEC said former Hydrogen CEO Michael Ross Kane hired Moonwalkers and its CEO Tyler Ostern “to create the false appearance of robust market activity” following the distribution of Hydro tokens through an airdrop, programs of bounties and direct sales in 2018. Kane then instructed Moonwalkers to sell the tokens in the “artificially inflated market” for over $2 million in profit on behalf of Hydrogen.

“As we allege, the defendants profited from their manipulation by creating a misleading image of Hydro’s market activity,” said Joseph Sansone, head of the enforcement division’s market abuse unit. of SEC law. “The SEC is committed to ensuring fair markets for all types of securities and will continue to expose and hold accountable market manipulators.”

According to the SEC, the actions of Kane, Ostern and the companies constituted manipulation of the crypto market, violating the provisions of US securities laws. The regulator reported that Ostern had agreed to pay more than $40,000 in refunds and interest, subject to approval by a federal court in New York “with civil monetary penalties to be determined at a later date.” The SEC complaint sought similar actions against Kane, as well as barring the former CEO from holding executive and director positions.

Many in the crypto space criticized the SEC complaint as an example of regulation by enforcement – ​​in this case, saying the regulator was extending airdrops to its jurisdiction.

“They say the airdrops meet the ‘money investment’ part of the Howey test, even though no one is investing and no money is changing hands,” said Jake Chervinsky, head of policy at crypto advocacy group Blockchain Association. “The SEC talks a lot about airdrops, but then only seems to be asserting that distributions via direct sales, bonus programs, and employee compensation are securities transactions.”

Others have suggested that while the SEC’s actions apparently rose to par on the application of crypto, they may not have necessarily targeted token airdrops:

Related: Binance denies market manipulation claims

Although the SEC has pursued numerous enforcement actions against initial coin offerings among crypto firms, the regulator’s position on the role of airdrops in purported token schemes is unclear. Commissioner Hester Peirce said in a February 2020 speech, the SEC hinted that a token airdrop “could constitute a securities offering.”

“Given that the SEC has found that some tokens may be securities, if you are considering using an airdrop token distribution, be aware that even giving away tokens is not necessarily exempt from scrutiny under the law. on securities”, said Peter Van Valkenburgh, research director at crypto lobbying group Coin Center, in a 2017 blog post.