Popular cryptocurrency investing app Abra accused to be offering security-based swaps to retail investors without registration.
A California-based cryptocurrency startup, a developer of cryptocurrency investment app Abra, has been charged by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) for offering and selling security-based swaps without registration.
Abra together with its related firm Plutus Technologies registered in the Philippines was further accused of failing to transact those swaps on a registered national exchange, as stated in the press release of July 13:
The SEC’s order finds that Abra and Plutus Technologies violated federal securities law provisions concerning unregistered offers and sales of security-based swaps and requiring that certain swap transactions occur on a registered national exchange.
Swaps are financial contracts between two counterparties that involve agreement to exchange (or swap) two different financial instruments within each other as a result of changes in asset price or interest rate.
Reportedly both Abra and Plutus Technologies have agreed to “a cease-and-desist” order and to pay the combined penalty of $150.000 for both SEC and CFTC regulatory authorities without agreeing or denying the accusations.
The investment app allows betting on price movements of the equity securities listed in the United States. According to the parallel report from CFTC, the company violated regulation requirements by providing an exposure to asset price movements to the investors from the US and foreign countries without determining if they were “eligible contract participants”.
As stated in the Commodity Exchange Act (CEA), the definition of “eligible contract participants” applies for both institutional and individual investors, who meet certain conditions, like holding $10 million in assets or any other entity. The term however does not apply for retail customers
Reportedly, Abra accepted orders and entered into thousands of contracts via the mobile application in a timeframe within December 2017 and February 2019. The contracts classified as swaps by the Commodity Exchange Act (CEA), allowed Abra app users from the US and abroad to make financial transactions on the US-listed equities, while Abra acted as a counterparty. In this way, the company violated the CEA, which makes entering swaps unlawful for anyone except the “eligible contract participant”. According to CFT Commission:
In soliciting and accepting orders for these contracts, the respondents illegally operated as an unregistered futures commission merchant.
Although the company claims to have stopped offering swap contracts and sales to non the US users since February 2019 after the warning from SEC, the report reveals that Abra has been further accused of marketing its mobile application to retail investors without taking any efforts to determine if the application users were “eligible contract participants” as required under the United States securities law.