US lawsuit against crypto exchange Bittrex leads to another million fine

The cryptocurrency exchange Bittrex refrains from defending itself in court against allegations by the US Capital Markets Authority SEC. Instead, the US company, its former CEO William Hiroaki Shihara and its Liechtenstein subsidiary Bittrex Global GmbH accept a ruling that they will have to comply with US securities law in the future. The two companies also agree to pay a total of $24 million to the US federal budget.

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The SEC accuses the defendants of operating a securities exchange and a clearing house in the USA without the required registrations, and of having acted as a broker. By law, these functions must be separate to avoid conflicts of interest to the detriment of investors or traders. Immediately after the lawsuit was filed in April, Bittrex Global denied the allegations.

Defendants now no longer deny the SEC’s allegations, but neither do they admit them. However, they accept consequences: These include the obligation to comply with certain US securities laws, to waive any legal remedies, and to pay $14.4 million in profit levy plus $4 million in interest plus $5.6 million in civil penalties. (Shihara himself does not have to pay, note.) The companies are not allowed to get the money back from insurance companies or other third parties, nor can they deduct it from taxes, nor are they allowed to offset it against lawsuits by aggrieved investors.

Bittrex is bankrupt, Bittrex Global is not

Shortly before the SEC lawsuit, Bittrex attempted to avoid legal trouble there by announcing it was ceasing US operations. Too late. In May, just a few weeks after the SEC lawsuit, Bittrex had to file for bankruptcy — despite having earned at least $1.3 billion in transaction fees from 2017 to 2022, according to the SEC. In contrast to some other cryptocurrency exchanges, Bittrex has not speculated with customer deposits. Customers should therefore be paid in full.

Even before the current million-euro fine, the US Treasury Department was the biggest creditor: In October, Bittrex had to accept a fine of 29.3 million dollars because it turned a blind eye to money laundering and other financial crimes for years. Transactions with a value of more than 263 million dollars from people or companies in Iran, Crimea, Cuba, Sudan and Syria are said to have gone through Bittrex – often even with addresses there.

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This is illegal in the US. According to investigators, many of these transactions were themselves suspicious, regardless of where the customers were or where they were based; nevertheless, the US company Bittrex has not filed a single complaint for more than three years.

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The foreign subsidiary Bittrex Global is not affected by the insolvency proceedings. Therefore, the SEC has secured the right to collect the fine from Bittrex Global should Bittrex fail to pay by March 2024. In addition, the defendants agree that they will no longer deny their guilt, that they and their managers will be available at all times to testify and provide documents to the SEC.

Binance doesn’t want the SEC to take a close look

Industry leader Binance, on the other hand, is no longer as cooperative with the SEC. The cryptocurrency exchange and its founder Changpeng Zhao (known as CZ) are accused by the agency of misusing investor funds, operating as an unregistered exchange, rigging prices and violating a host of other US securities laws. The auditor employed by Binance.US was apparently unable to determine whether the customer balances were actually offset by collateral. In June, the SEC filed a lawsuit, the defendants deny the allegations.

The SEC feared the loss of customer balances during the proceedings and asked the court for urgent protective measures. As a result, Binance undertook to bring US customers’ credit back to the USA and to operate the US business independently of foreign business for the time being. Binance also promised to disclose books, US customer lists, bank accounts, crypto wallets and SEC files. Whatever the SEC finds there, they can use in the civil case against Binance and CZ.

Apparently, Binance did not expect the authority to actually check and want to know where and how the deposits of each individual US customer are kept. This makes Binance uncomfortable. On Tuesday, Binance complained to the court. The investigations of the SEC went too far and should be limited. And because the CEO and CFO wouldn’t know anything anyway, they shouldn’t be subpoenaed anymore.

The Bittrex case was named SEC v Bittrex, Bittrex Global et Shihara and was filed in US District Court for Western Washington under case number 23-cv-580. The lawsuit against Binance is named SEC v Binance Holdings, Bam Trading Services, Bam Management US Holdings, et Changpeng Zhao and is pending in the United States District Court for the Capital District of Columbia under case number 23-cv-1599.

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