Crypto Biz Bankrupt? Securities regulators are looking for (1)

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The enforcement action taken by securities regulators in six states against crypto trading platform Abra (formally Plutus Financial Inc. and its subsidiaries) adds a coda to my analysis in May that state regulators transmitting money do not consistently respond to insolvent crypto businesses. When these companies are investigated under securities law, the response appears to be more proactive and quicker than investigations by the state money transfer company regulator. .

Abra was not licensed as a money transmitter; it has outsourced its transaction processing to Prime Trust (itself recently suspended for insolvency under Nevada trust law and likely to end up in receivership), which holds money transfer licenses in many States. As a result, regulators of state money issuers don’t watch Abra. But after Abra offered an unregistered stock last year, securities regulators in Alabama, Kentucky, New Jersey, Texas, Vermont and Washington state reviewed the finances of the company and the orders stemmed from the insolvency discovered this year.

It’s no surprise that Abra is in trouble. Its two products Abra Earn and Abra Boost were variants of interest-bearing crypto deposits characterized as illegal securities not registered in multistate settlements last year and a Securities and Exchange Commission settlement with Kraken earlier this year. States with orders against Abra Earn had prior actions now settled against crypto interest products by BlockFi and Nexo.

Like other issuers of unregistered crypto interest products, Abra has been investigated by a multi-state task force. These financial problems allowed the states to accuse Abra of fraud in issuing securities. Although Abra Boost can be sold without registration under Regulation D, financial status is still important to any securities transaction. Abra falsely proclaimed its financial health despite information in the possession of regulators showing $25.2 million in negative assets, and regulators acted soon after.

What draws regulators’ attention to insolvent crypto firms? In the Abras case, authorities were looking for securities violations and also found insolvency. The enforcement against Abra indicates that securities regulators are no longer surprised that bankruptcy follows other enforcement actions and will seek it out when they see further issues with a crypto firm.

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