Blockchain Legal Resource

On September 27, 2018, the Securities Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) charged an international securities dealer with illegally offering and selling to U.S. investors security-based swaps funded with bitcoins and related violations of the Commodities Exchange Act. The broker, 1pool Ltd., a.k.a. 1Broker, and its CEO, Patrick Brunner, were both named in the complaint filed by the SEC with the U.S. District Court for the District of Columbia. 

The SEC’s complaint alleges that 1Broker marketed the security-based swaps as “contracts for difference” (“CFDs”), for which all payments to 1Broker and to accountholders were exclusively made in Bitcoin. Through the 1Broker website, accountholders could purchase long or short positions in a CFD that tracked the price of a U.S. company’s publicly traded stock. 1Broker acted as the counterparty on every CFD, meaning it took the alternate position on each CFD from the accountholder. The SEC’s complaint states that the CFDs are securities under federal securities laws, and explains that securities-based swaps must be registered with the SEC and executed on a registered national exchange. The SEC also claims that 1Broker was required to register with the SEC.

The CFTC filed its own complaint for similar charges in a parallel action, citing a failure to register with the CFTC as a futures commission merchant and failing to implement related anti-money laundering and know-your-customer processes. The CFTC’s complaint is more heavily focused on 1Broker’s use of Bitcoin to market its CFDs, and cites in the first line of its complaint a line from the 1Broker website: “We connect Bitcoin with global markets.” Notably, 1Broker is registered in the Marshall Islands and Brunner is a resident of Austria, which did not stop the SEC and CFTC from claiming violations of U.S. securities laws. The SEC worked with the FBI and used an undercover Special Agent to successfully purchase several of the CFDs in the U.S. in order to build the case against 1Broker and Brunner. Subsequent to the SEC and CFTC filing their respective claims, the FBI seized the 1broker.com domain citing the charged violations of federal law.

These parallel complaints by the SEC and CFTC are a reminder that even internationally based companies are subject to U.S. securities laws if and when they offer and sell securities within the U.S. In its press release announcing the charges, the Director of the SEC’s Fort Worth Regional Office stated, “[i]nternational companies that transact with U.S. investors cannot circumvent compliance with the federal securities laws by using cryptocurrency.”