Originally posted on The Daily Bit.
Yesterday was a doozy for 1Broker. The international securities dealer was dealt the lethal Triple Whammy, receiving charges from the SEC, CFTC, and FBI for an assortment of unregistered/illegal activity taking place on the website:
A quick primer on 1Broker: The platform allowed users to trade Contracts For Difference (CFDs) by depositing Bitcoin into their accounts after completing a (very) lax onboarding process that required an email address and username.
Now, for the charges:
Whammy One: SEC
Per a press release, an undercover agent “successfully purchased several security-based swaps on 1Broker’s platform from the U.S. despite not meeting the discretionary investment thresholds required by the federal securities laws.”
- Products weren’t transaction on a registered national exchange
- Never properly registered as a security-based swaps dealer
Not much going on here. As for those ‘discretionary investment thresholds’, they’re defined in the CFTC’s filing. So, without further ado…
Whammy Two: CFTC
Before jumping in, here’s the TL;DR of the CFTC’s report:
Under CFTC regulations, a business that provides services to United States citizens can’t solicit or accept “orders from non-eligible contract participants (“non-ECP”)”. An ECP is later defined in the filing as folk who:
- (i) has amounts invested on a discretionary basis, the aggregate of which exceeds $10 million, or
- (ii) $5 million if the individual enters into the transaction to manage risk tied to the trade in certain capacities
The second issue concerns what the CFTC identifies as “retail commodity transactions”. These are your non-ECP users that were able to trade CFDs on the platform.
Finally, there’s the lack of KYC/AML measures. By now, it should be clear that any trading platform with ties to the United States — whether or not they’re directly advertising to U.S. citizens — needs to meet all regulatory standards.
That’s a potentially massive operational risk for platforms that:
- (i) Don’t block registrations using VPNs
- (ii) Have security tokens listed on their platform, while
- (iii) Aren’t officially registered to trade those securities
What’s curious? The CFTC has 1Broker on the hook for activities dating back to February 2016. Makes you wonder how many undercover agents have accounts — talking probabilities, they absolutely do — on platforms and what other cases are being built up, if any, behind the scenes.
Whammy #3: FBI
In terms of length, the FBI’s write-up is similar to the SEC’s. Four violations were charged against 1Broker “upon a probable cause finding… that the 1Broker domain was used, or was intended to be used, to commit or facilitate criminal violations”.
Those violations are:
- Money laundering
- Wire fraud
- Willfully operating as an unregistered broker/dealer of securities
- Willfully operating as an unregistered futures commission merchant
More or less the same rap sheet as the other bodies, with additional panic caused by seizing 1Broker’s domain.
Could exchanges face a temporary Black Swan?
Once again, hats off to Alex Krüger for drumming up thought-provoking conversation on what could follow. There’s no denying that this particular outlook falls within the realm of possibility:
The bottom line: If that does happen… funds are far from “safu”. All 1Broker account withdrawals are frozen until further notice, and folks won’t be able to access their accounts without approval from the SEC.
P.S. — Not to spread FUD, but a non-US exchange going down could be disastrous (temporarily, as Krüger notes) given the hundreds of millions in trade volume collectively processed by the platforms.