Crypto Exchange Shuts Down Amid SEC Charges

On March 29th, 2023, the U.S. Securities and Exchange Commission (SEC) charged the online  crypto asset trading platform, Beaxy Exchange, and its executives, with failing to register as a national securities exchange, broker, and clearing agency¹.  The SEC also charged several market-makers that operated on the Beaxy platform as unregistered dealers. The founder of Beaxy Exchange was charged with raising $8 million in an unregistered offering of the Beaxy token (BXY) and misappropriation of those funds.

Beaxy Exchange was a U.S.-based crypto-trading platform that offered crypto trading and custody services. Beaxy Exchange was initially funded through an initial coin offering, Beaxy token (BXY), that was completed in September 2018. The offering raised approximately $8 million in Bitcoin, Ethereum, and fiat currency from investors. Investors received BXY in exchange for their investment. Beaxy Exchange permitted the trading and custody of BXY in addition to many other crypto assets.  Windy Inc., which is a Financial Crimes Enforcement Network (FinCEN)-registered money services business, took over Beaxy Exchange in 2019.

When the SEC charged the founder of Beaxy with conducting an unregistered security offering, the SEC charged that BXY is a security. The SEC also charged that another token, Dragonchain, which was also traded on the Beaxy Exchange, was an unregistered security. 

The SEC complaint alleged that Beaxy Exchange was in violation of the Securities Exchange Act of 1934 because it²: 

• Brought together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interacted, and the buyers and sellers entering such orders agreed to the terms of a trade, and thus should have registered as an exchange; and
• Acted as an intermediary in making payments and deliveries upon matching buy and sell orders and maintained custody of customer assets, and thus should have registered as a clearing agency; and
• Was regularly engaged in the business of effecting transactions for the account of others in crypto assets that were offered and sold as securities, and thus should have registered as a broker; and
• The market makers, who provided market-making services for the BXY token and Dragonchain token, were charged by the SEC for operating as unregistered dealers. Since both tokens were alleged to be unregistered securities, the SEC charged that providing market-making services and acting as intermediaries in the buying and selling of securities required the market-makers to register as dealers. 

Why is This Important?

The SEC continues to focus on determining whether digital assets are securities. While Beaxy Exchange was a relatively small exchange, the charges that tie back to the trading, clearing, and dealing of unregistered securities may have big implications across the industry. Indeed, the SEC has already charged or is investigating several large cryptocurrency exchanges with offering unregistered securities³. 

SEC Chairperson Gary Gensler recently reiterated his stance that proof-of-stake tokens should be regulated as securities⁴.  If all staking products or proof-of-stake tokens are ultimately determined to be securities, then most crypto exchanges offering services in the U.S. will have to comply with the federal securities law, including applicable registration requirements. This would be a significant change from the current regulatory environment, where most digital asset businesses are licensed and regulated as money transmitters.

How Guidehouse can Help

Current regulatory guidance requires crypto providers to register as money service businesses (MSBs) with FinCEN and meet individual state registration requirements. Guidehouse can assist crypto providers in the pre-registration phase to obtain an MSB license from FinCEN and/or individual state licenses, including the New York State Department of Financial Services BitLicense. If there are changes to U.S. regulations requiring crypto exchanges to register with the SEC, Guidehouse is positioned to assist crypto providers to meet these new requirements.