Bittrex US’s Alleged Bankruptcy: A Blow to the SEC

On April 17, 2023, the SEC filed a lawsuit against Bittrex, a surprising development considering the platform's presence in the US market since 2014. 

The SEC's accusations went beyond the exchange itself, reaching its co-founder, Bill Shihara, who held the position of CEO from 2014 to 2019. The lawsuit outlined a series of purported violations. Notably, Shihara faced allegations of leading an unauthorized securities exchange and engaging in unauthorized broker and clearinghouse services.

According to the lawsuit, from 2017 to 2022, Bittrex reportedly garnered no less than $1.3 billion, with a significant portion derived from transaction fees. Gary Gensler, the SEC's chairman, suggested that for Bittrex, profit motives might have overshadowed investor protection concerns. Furthermore, Gensler emphasized that this lawsuit should serve as a warning to other US-based crypto exchanges.

Today’s action not only holds Bittrex accountable for misconduct that we allege put investors at risk, but should also send a message to other non-compliant crypto market intermediaries to follow the federal securities laws or be held accountable for their violations.

Crypto market participants universally interpreted the SEC's message as follows: “We have initiated our punitive actions with a lesser-known American exchange, Bittrex. This is a warning shot. All others, brace yourselves. You're on our radar.”

SEC's Anticipation

In 2023, the SEC felt the time was right to confront the “renegades” — cryptocurrency companies and exchanges that persistently declined to classify digital assets as securities, as the regulator suggested. They operated without registering with the SEC and largely ignored the Commission's claimed right to govern the cryptocurrency landscape. The SEC picked Bittrex, a modest player in the U.S. market, anticipating that it would cooperate to safeguard its revenues and stand as a precedent for other market entities. But things didn't go as planned…

Bittrex's Position

Reacting to the allegations, Bittrex clarified that its trading platform never hosted or proposed any securities transactions:

For over five years, and despite multiple, specific requests to do so, the SEC would not provide notice of the specific conduct that it thought violated the federal securities laws. Specifically, on multiple occasions, we asked them to tell us what digital assets on our platform they viewed as securities, so that we could review and potentially delist them. They refused to do so.

Bittrex emphasized its dedication to legal compliance and conveyed its eagerness to face the upcoming legal challenge, steadfast in defending its perspective.

Bittrex's Unsuccessful Attempt at Pacifying the SEC

It's pertinent to highlight that Bittrex had previously tried to placate the SEC proactively but to no avail. 

In the wake of the SEC's lawsuit against Ripple on December 17, 2020, accusing its XRP token of being an unregistered security, Bittrex's management decided to take precautionary measures. They declared the removal of XRP from their trading platform on December 29, 2020. Subsequently, on January 15, as a gesture to possibly alleviate SEC's concerns, Bittrex announced the delisting of the privacy coins Monero, Zcash, and Dash, which had also been under the regulatory scanner concerning AML requirements. It seems these moves, intended as gestures of cooperation, were interpreted by the SEC as signals of vulnerability.

Bittrex's Brilliant Move

This time around, Bittrex's management came to the realization that attempts at pacification would lead nowhere. Hence, they made a tactical move. As the SEC anticipated their cooperation, Bittrex filed for bankruptcy in the U.S. Importantly, they emerged from this “David vs. Goliath” situation on top, leveraging Chapter 11 of the U.S. Bankruptcy Code. As per the prevailing legislation, this chapter allows a company to file for bankruptcy and subsequently restructure itself outside of the country. This clever strategy allowed Bittrex to exit the U.S. jurisdiction with minimal reputational fallout, continuing its operations in other nations where it had a foothold.

This bankruptcy decision impacted only Bittrex Inc. in Seattle, two of its subsidiaries in Malta, and Desolation Holdings LLC. Collectively, they had over 100,000 creditors, with their assets valued between $500 million and $1 billion. Bittrex US's obligations were similarly estimated.

SEC's Outcome

The only significant achievement by the regulator was facilitating the symbolic bankruptcy of an American company that wrapped up its operations within U.S. borders. As a result, hundreds of U.S. employees found themselves out of work. Now, the exchange has shifted its focus to the expansion of its global arm, Bittrex Global, which has its headquarters in Liechtenstein and is now the magnet for its client investments.

A vital lesson from this episode is clear: any U.S. crypto enterprise or exchange facing domestic regulatory pressures now possesses a blueprint to address such a scenario.

Currently, the SEC seems poised to target other U.S. crypto exchanges using a similar approach. Yet, there's a growing sentiment that the SEC might once again come up short. Gary Gensler might need to become accustomed to setbacks as long as he remains in his role… Though, his tenure might be short-lived.