The SEC claims fintech and ‘market maker’ firms manipulated the crypto market in the 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 related to allegedly conducting 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, bounty programs and direct sales in 2018. Kane then had the Moonwalkers sell tokens in the “artificially inflated market” for more than $2 million in profits on behalf of Hydrogen.
“As we allege, the defendants benefited from the manipulation by creating a misleading image of Hydro’s market activity,” said Joseph Sansone, head of the SEC Enforcement Division’s market abuse unit. “The SEC is committed to ensuring fair markets for all types of securities and will continue to expose and hold market manipulators accountable.”
According to the SEC, Kane’s, Ostern’s and their companies’ actions constituted manipulation of the crypto market, violating provisions of US securities laws. The regulator reported that Ostern had agreed to pay more than $40,000 in disgorgement and interest, subject to approval by a New York federal court “with civil monetary penalties to be determined at a later date.” The SEC’s complaint sought similar actions against Kane, as well as barring the former CEO from holding officer and director positions.
Many in the crypto space criticized the SEC complaint as an example of regulation by enforcement — in this case, arguing that the regulator was expanding airdrops into its territory.
“They say airdrops meet the Howey test of ‘investment of money,’ even though no one makes an investment and no money changes hands. so Jake Chervinsky, head of policy at the crypto advocacy group Blockchain Association. “The SEC talks a lot about airdrops, but only seems to argue that distributions via direct sales, bounty programs, and employee compensation are securities transactions.”
Others suggested that while the SEC’s actions may have been ostensibly par for the course in crypto enforcement, they may not necessarily have been aimed at token airdrops:
To be fair, the complaint seems to suggest that the “prizes” where users were rewarded with tokens for a promotional action count towards that clause. Not the generic airdrop.
I still don’t think it should merit an “investment of money”, but there is arguably more precedent.
— Adam Cochran (adamscochran.eth) (@adamscochran) 28 September 2022
Related: Binance denies allegations of market manipulation
Although the SEC has pursued numerous enforcement actions against initial coin offerings among crypto firms, the regulator’s stance on airdrops’ role in alleged token schemes is unclear. Commissioner Hester Peirce said in a speech in February 2020 that the SEC has suggested that a token airdrop “could constitute an offering of securities.”
“Since the SEC has determined that some tokens may be securities, if you are considering an airdrop token distribution, be warned that even giving away tokens is not necessarily free from scrutiny under securities law,” said Coin Center’s director of research for the crypto lobbying group, Peter Van. Valkenburgh in a blog from 2017.
