US Regulators Take Joint Action Against Crypto Firms’ for Entering into Illegal off-exchange Swaps Offering


July 14, 2020 5:51 pm

US Regulators Take Joint Action Against Crypto Firms’ for Entering into Illegal off-exchange Swaps Offering
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Two related cryptocurrency firms have fallen foul of United States financial regulators for entering into illegal off-exchange swaps in digital assets and foreign currency. 

The U.S. Commodity Futures Trading Commission (CFTC) issued an Order filing and settling charges against the two firms Plutus Financial, Inc. d/b/a Abra of California, and Plutus Technologies Philippines Corp. on July 13. The same day, the U.S. Securities and Exchange Commission (SEC) announced that it had reached a settlement agreement with the respondents ahead of instituting its cease-and-desist proceedings. 

Settlement With the SEC

The two respondents operate from Manila in the Philippines and Mountain View, California, and are named “Plutus Technologies Philippines Corporation” and “Plutus Financial, Inc. d/b/a Abra” respectively. The announcement states, 

“Abra is a private company headquartered in California that offers a phone application allowing people to conduct financial transactions through contracts memorialized on the Bitcoin blockchain.”

According to the SEC, the Abra mobile app allowed users to enter into financial transactions with Abra or Plutus Tech acting as the counterparty. Users were encouraged to fund their accounts by putting U.S. dollars, Bitcoin (BTC) or other assets and, as of March 2018, were able to enter into contracts to gain synthetic exposure to the price movements of dozens of currencies, including the euro and the Mexican peso.

Abra expanded its business to enable app users to enter into contracts that provided synthetic exposure to the price movement of U.S. stocks and exchange-traded funds, in February 2019. The publicity campaign for the offering allegedly highlighted that users of the app would not be needed to undergo Know Your Customer (KYC) procedures. 

Following conversations with the SEC, Abra terminated to offer these contracts but then resumed the offering in the second half of 2019, while attempting to restrict them to non-U.S. residents:

“Specifically, the companies said that foreign investors would enter into contracts with Plutus Tech, a private Philippine company partially-owned by Abra and dependent on Abra for funding and on Abra employees in California to run most of the business.”

According to the Securities and Exchange Commission, the contracts’ design, investor solicitation, marketing and hedging through stock and ETF purchases in the U.S. were all done by the California team. Moreover, despite screening and controls by both firms, Plutus Tech enrolled in contracts with five people in the U.S.

The Commission has estimated that the contracts in question were security-based swaps and were offered and sold to non-eligible contract participants without an effective registration statement, in breach of the U.S. Securities Act. Furthermore, the offerings violated the Exchange Act by effecting transactions with the U.S. and overseas retail investors outside a registered national securities exchange.

Both firms are taking remedial actions that were accepted by the SEC and will comply with permissions that require them to cease operating in violation of securities laws. Also, they will jointly pay a civil penalty of $150,000.

Civil Monetary Penalty

The CFTC has required the two respondents to pay a $150,000 civil monetary penalty and to cease from further violations of the Commodity Exchange Act as charged.

These violations involve unlawfully offering swaps to U.S. and overseas customers that were joined into without being subject to the rules of a board of trade designated as a contract market and they also involve operating illegally as an unregistered futures commission merchant.

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