Last week, the U.S. Securities and Exchange Commission (SEC) charged Hydrogen Technology Corp and its former CEO for market manipulation of crypto asset securities. Throughout the year, the SEC has nearly doubled the size of their enforcements crypto assets and cyber unit. Experts speculate that the crypto market will see greater adoption and stability due to the active prosecution and removal of bad actors.
In late September, the SEC filed charges against Michael Ross Kane, former CEO of Hydrogen Technology Corporation, and Tyler Ostern, former CEO of Moonwalkers Trading Limited.
The enforcement action claims the sale of unregistered securities called Hydro tokens (Hydro) and for taking part in a scheme to manipulate the trading volume and price of those securities for a profit greater than $2.2 million.
In January 2018, Kane and Hydrogen, a financial technology company based in New York, began promoting the Hydro token. The corporation used several methods to distribute Hydro. Including an airdrop to the general public, bounty schemes, staff rewards, and direct sales on cryptocurrency trading platforms.
The lawsuit claims that after distributing the token to retail investors, Kane and Hydrogen made a deal to manipulate the token trading volume with Moonwalkers, a South African company. Moonwalkers allegedly agreed to use its specialized trading bot software to create an illusion that Hydro has market activity. Kane and Hydrogen then allegedly sold Hydro into the fictitious market for a $2.2 million profit.
Market Abuse Unit Chief Joseph Sansone of the Enforcement Division said, “By creating a misleading impression of Hydro’s market activity, the defendants allegedly benefited from their manipulation.”
Crypto Regulation Incoming
The charges against Hydrogen come just days after Sparkster agreed to pay the SEC $35 million to a harmed investor fund for an unregistered crypto-asset offering. Carolyn M. Welshhans, Associate Director of the SEC Enforcement Division, claims that the SEC will continue to protect investors by pressing charges against companies framing unregistered offers of securities as rewards, compensation, or any other method.
Around the same time as the SEC filing, more than 8 U.S states filed actions against crypto lender Nexo. The actions taken by regulators around the U.S, including the White House, signal a government willingness to regulate crypto and help scale adoption.
Airdrop Tokens Can Be Securities?
Free tokens given away by a project, called an airdrop, is a frequently used promotional tool for new cryptocurrencies. The SEC alleges that airdrops, as in the case of Hydrogen, can make investors vulnerable to market manipulation.
Essentially, Hydrogen failed the Howey Test by selling the Hydro tokens after airdropping them. Todd Phillips, an attorney for banking and administrative law, underlined that the defendants in the Hydro case sold their tokens on the secondary market after the airdrop.
Hydrogen Bites Back: SEC Claims Lack Proof
Tyler Olsten, the CEO of Moonwalkers, chose to pay $36,750 and any additional civil fines or penalties that the court may impose later throughout the case. Conversely, Hydrogen responded to the SEC’s indictments by claiming a lack of concrete evidence.
The defense calls into question the precedent set by labeling airdrops as a distribution of unregistered securities. If true, all other coins delivered by airdrops must also be considered unregistered securities.
Airdrops are a common practice for new crypto projects. For example, airdrops occur for creating DAOs or transferring control and responsibility from a development team to the users.
The path toward regulating the cryptocurrency market is challenging lawmakers and innovators. Existing methods for determining what is or is not considered a security by the SEC may need to expand for legitimate crypto projects to operate and still filter out the bad actors.