The Securities and Exchanges Commission (SEC) together with the Commodities Futures Trading Commission (CFTC) have charged a 26 year old based in Austria, Patrick Brunner, and his company 1broker, with failing to register with the SEC/CFTC and with failing to apply Anti-Money Laundering (AML) and Know Your Customer (KYC) identification requirements.
SEC says 1Broker offered contracts for difference (CFDs) based on stocks, like Apple or Tesla. The platform had margins as well, ranging from 15x to as high as 200x, with account registration as easy as entering an email and a password.
Only bitcoin could be used to fund the account. Once funded, individuals could then trade on derivatives of stocks or commodities or fiat currency movements. The platform did not offer spot trading in stocks, but SEC says:
“Because the values of the CFDs are tied to the values of underlying securities, market indices, or other financial assets or benchmarks, they are security-based swaps under the federal securities laws.
Absent certain exceptions (which do not apply here), the federal securities laws require that offerings in security-based swaps be registered with the SEC and that the transactions be executed on a registered national exchange.
Likewise, 1Broker—which acted as a dealer in the CFDs—was required to register with the SEC. Because neither the CFDs nor 1Broker was registered and because the transactions were not executed on a national exchange, the Defendants violated the federal securities laws.
Brunner, who controlled 1Broker and directed its activities, was a culpable participant in 1Broker’s violations…
1Broker and Brunner did not determine whether account holders met certain discretionary trading thresholds. The unregistered sale of security-based swaps is legal when the sales are limited to ‘eligible contract participants’—which are high-net-worth individuals and certain types of sophisticated and/or regulated entities. The sales of 1Broker CFDs were not so limited.
Similarly, the CFD transactions were not effected on a registered national securities exchange, as required. Instead, all of the sales took place through the 1broker.com website—which is not registered in the U.S.”
There appears to be no substantial complaint by either SEC or CFTC as neither alleges that the platform was engaging in any price manipulation or any fraud.
The action instead seems to be based solely on the fact that he has not registered with SEC and CFTC, or alternatively, that he has not limited the offerings to only the very rich and bankers who are exempt from being required to register by a nearly century old law called the Securities Act 1933 and 1934.
This platform is very small. They say they have only 50,000 customers, and have been operating since 2012 without any apparent problem.
A bitcoin trading group, Whalepool, used to promote them, with Whalepool publicly stating after this news was announced:
“Maybe this is why “1gox” was not a very funny joke @1Brokercom. Give users their money back, f*** SEC approval you are goxing your users!”
1pool.ltd, the company behind 1broker, says they are seeking legal advice and permission from SEC/CFTC to allow individuals to withdraw. They say:
“On September 28th 2018, our domain 1broker.com was closed by the United States Securities and Exchange Commission (SEC). This means that the trading panel is not accessible anymore – funds, servers and databases are not affected. Currently, our top priority is to allow customer withdrawals.
The company holds enough funds to cover all withdrawal requests, of course. Before we can take the required steps to do that, we have to seek the permission from the authorities. During this whole process, we are supported by our lawyers and we will regularly post updates here.
Please note that all emails sent to @1broker.com addresses are not received by us – we will set up an email address where you can contact us in the next 24 hours.”
The platform was registered in Marshall Islands, a tiny patch of land in the middle of the Pacific Ocean. SEC however says they have jurisdiction because an “undercover” FBI agent was able to buy CFDs through their platform while he was physically present in US.
An argument that might not face much challenge, except for by the defendant, as the Islands are so tiny. It would be interesting to know, however, how the British Prime Minister, or French President, or the German Chancellor, or indeed Austria’s young leader, would respond to suggestions that America has jurisdiction over companies incorporated in their own country.
To say nothing of Russians or the Chinese, but what would be more interesting to know is whether this is a warning shot to far bigger players in the crypto trading space.
The problem there is that CFTC has failed to green-light reasonable margins of say up to 20x on regulated exchanges. Yet, regulated or not, there should be considerable warning regarding such margins because they can quickly lead to substantial losses.
It may be however that Congress and the public needs to engage in a debate on how we can update these discriminatory century old laws to fit a digital age because the Securities Act 1933 is failing, and badly, in many cases. Something which is no surprise as it was passed when the latest innovation was horse carriages.