Litigation involving cryptocurrency is increasing in Washington and around the country—both between private parties and in regulatory enforcement actions brought by the U.S. Securities and Exchange Commission, the Washington Department of Financial Institutions (“DFI”), and similar agencies. This trend will only continue to increase.

Here in Washington, DFI has been active in enforcing state securities laws against companies and their principals who have sought to raise capital through initial coin offerings (“ICOs”) and related activity. Like the SEC, DFI has concluded that “the offer and sale of digital assets in ICOs or other token sales is frequently subject to regulation under state and federal securities law.”[1] 

DFI has already developed quite a track record in bringing enforcement or investigatory actions against parties for engaging in unregistered crypto offerings. The following are a few notable examples:

  • In re Dragonchain, Inc., Order No. S-18-2433-21-CO01: DFI entered into a Consent Order with a Bellevue, Washington-based blockchain platform for allegedly failing to register a 2017 ICO that raised $12.7 million from 5,000 investors.
  • In re Unikrn, Order No. S-18-2441-20-CO01: DFI entered into a Consent Order with Unikrn, Inc., for allegedly failing to register a $47 million offering of tokens that were designed for use on the company’s e-sports betting platform.
  • In re RChain Cooperative, Order No. S-18-2463-20-CO01: DFI entered into a Consent Order with a Seattle-based cooperative association operating a blockchain network with over 1,700 members. DFI alleged that the company raised $30 million through multiple unregistered offerings of tokens backed by the Ethereum blockchain.
  • In re Duber Technologies, Statement of Charges, No. S-18-2475-19-SC01: DFI charged a Washington company planning to operate a digital platform for the cannabis industry with engaging in unregistered securities transactions by offering the sale of digital tokens designed to function as a medium of exchange on its platform. The offering was advertised nationally but was later discontinued.

These cases illustrate that DFI has interpreted the definition of a “security” broadly under state law. They further illustrate that risks faced by businesses and entrepreneurs in the crypto space as a result of that broad interpretation.

Source: https://dfi.wa.gov/consumers/virtual-currency

[1] Washington Department of Financial Institutions, Digital Assets and Securities Laws, April 3, 2019, at https://dfi.wa.gov/sites/default/files/digital-assets-securities-laws.pdf.

Authors: John Bender, Jack Lovejoy