Is Cryptocurrency Security
LUCKNOW (CoinChapter.com) — The U.S. Department of Justice (DoJ) has, for the first time, classified a cryptocurrency as a security asset. This ruling came as part of the sentencing of Shane Hampton and Michael Kane, founders of Hydrogen Technology’s HYDRO token, for market manipulation.
Source: X
On June 25, the DoJ announced the sentencing of Hampton and Kane for artificially inflating the price of HYDRO token. The department determined that their sales of HYDRO constituted unregistered investment contracts. Hampton, Hydrogen Technology’s CEO, received a sentence of two years and 11 months, while Kane, the company’s head of financial engineering, got more severe sentence of three years and nine months.
The Mechanics of Manipulation — Bots, Wash Trades, and Spoofing
The court found that Hampton and Kane had employed Moonwalkers Trading Limited, a South African firm, to deploy an automated bot for market manipulation. This bot flooded the HYDRO markets with a $7 million in wash trades and $300 million worth of spoof orders.
These deceptive practices were designed to lure retail investors into purchasing HYDRO tokens at artificially inflated prices. Through their manipulative efforts, Kane, Hampton, and their co-conspirators reaped approximately $2 million in profits over a 10-month period.
Kane pleaded guilty to charges including conspiracy to commit securities price manipulation and wire fraud in November 2023. Two co-conspirators, Andrew Chorlain and Tyler Ostern, entered similar guilty pleas in May 2023.
Hampton’s case made history as the first instance where a jury trial concluded that a crypto asset constituted security. He was convicted of conspiracy to commit securities price manipulation and wire fraud in February.
This Is Not The First Case…
While this case marks the DoJ’s first determination of a cryptocurrency as a security asset, the U.S. Securities and Exchange Commission (SEC) has been actively pursuing enforcement actions against various digital assets in recent years.
The Ripple vs. SEC case has been a pivotal battleground in such cases. This high-profile lawsuit centered on whether Ripple’s XRP should be classified as a security. The SEC argued that Ripple’s XRP sales constituted unregistered securities offerings, while Ripple maintained that XRP is a digital currency, not a security.
In a decision in July 2023, a U.S. court ruled that XRP is not a security when sold on exchanges through programmatic sales. However, the court deemed XRP a security when sold directly to institutional investors, as these sales met the criteria of an investment contract under the Howey Test.
The implications of this ruling extend beyond Ripple, potentially influencing other ongoing and future cases. In 2023, the SEC filed lawsuits against major U.S. centralized exchanges Coinbase and Kraken, alleging their facilitation of trade in unregistered securities.
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