Analysis by Drew Hinkes of Berger Singerman LLP.
On June 1, 2015, the Securities too Exchange Commission (SEC) close downwardly too fined Sand Hill Exchange for acting equally unregistered broker-dealers, selling security-based swaps, too offering swaps on an unregistered securities exchange.
Sand Hill was a bold experiment: Could a trading platform operated across the Bitcoin blockchain let parties to merchandise derivatives based on the perceived value of pre-IPO companies? Although Sand Hill may accept accomplished the construction of a functional derivatives marketplace position traded over the blockchain, the SEC was unimpressed, chop-chop shutting it down.
The storey of an audacious startup skirting regulations viewed yesteryear around equally overbearing, amongst the ensuing swift too severe regulatory answer may live on quondam intelligence to businesses operating the virtual currency space, but Sand Hill’s saga emphasizes 2 fundamental points to shout out back for whatever draw of piece of job concern seeking to disrupt regulated fiscal markets.
- Change Must Occur Within the Confines of the Law
Sand Hill sold synthetic derivatives linked to the perceived value of unlisted pre-IPO companies. Sand Hill used illegal “Contracts for Difference” (CFD), a contract amongst a counterparty to settle inwards cash if the value of an property changes at a fourth dimension inwards the future.
Thus, if the projected valuation of a portion of pre-IPO “Business X” was $10 when Purchaser obtained a CFD of Business X on Sand Hill, too the valuation increased at the contract short town date, Purchaser would accept earned value that could live on liquidated.
To skirt the considerable registration burden associated amongst trading (legal) equities, Sand Hill manifestly conducted its transaction activity over the Bitcoin blockchain. CFDs, however, are illegal to sell over whatever trading medium inwards the United States. Sand Hill also confessed to having inserted trader “bots” that created the illusion of active trading book to populate their marketplace. Of course, these bots could also live on used to intentionally manipulate values of the instruments beingness traded.
Less than a calendar month later taking its platform live, Sand Hill reported that it was close downwardly too fined $20,000 for multiple violations of SEC regulations, including acting equally unregistered broker-dealers, selling security-based swaps, too offering swaps on an unregistered securities exchange. Notably, Sand Hill stated inwards its weblog that it had client holdings simply inwards the depression thousands of dollars.
Co-founder Elaine Ou’s weblog post service nigh the SEC shutdown is eye-opening, too captures a zeitgeist mutual amid virtual currency startups: We are hacking the organization to move inwards ameliorate too nobody is getting hurt, then regulators, delight move out us alone.
However, equally Bloomberg observed, “Just because you lot mumble the discussion ‘blockchain’ doesn’t make otherwise illegal things legal.” As Sand Hill, Ripple, too others are learning, regulators volition enforce the constabulary against violators regardless of their philosophical ideology, grade of funding, or stated intention.
Blockchain technology scientific discipline may inevitably reform the fiscal structures of many markets, but illegal, unregistered activity volition e'er depict the attending of regulators. Innovation based upon blockchain technology scientific discipline may live on the future, but that conception tin forcefulness out too should live on conducted inside the acquaint confines of the law.
- Just Because You Can Does Not Mean You Should.
It appears that Sand Hill knew that it was beingness investigated yesteryear the SEC. The society posted a serial of weblog entries noting the utilization of its site yesteryear the SEC. Using Google Analytics too other forensic tools, ostensibly to rails user engagement, Sand Hill published a weblog post service demonstrating:
- the SEC was aggressively using Sand Hill’s site,
- the issue of SEC users using the site,
- information regarding the interests too surfing habits of the SEC users of the site, including the IP addresses, those users’ other often visited sites, too the total of fourth dimension spent engaged amongst Sand Hill’s service.
Predictably, according to unofficial comments, this was viewed equally ‘doxing,’ or publishing personal data nigh the SEC investigators, too considered a serious affront.
Sand Hill appears to accept used legal agency to rails the SEC’s investigative behavior. However, from a strategic standpoint, exposing this data publicly may non accept been inwards Sand Hill’s interest. The SEC has considerable regulatory ability too tin forcefulness out attempt injunctions too levy pregnant fines.
Although Sand Hill’s technology scientific discipline too philosophy may live on of involvement to the virtual currency community, its lead too the probable resultant on its sense amongst regulators should live on noted. Antagonizing regulators is a misfortunate negotiating strategy, fifty-fifty if you lot are using legal agency too world data to practise so.
No affair the perceived wrong, potential regulatory targets volition e'er practise goodness from audio legal advice from counsel. Just because you lot tin forcefulness out practise it, does non hateful you lot should practise it.
Photo yesteryear AgnosticPreacherskid / CC BY-SA 3.0