SEC and CFTC Fine Crypto Investment App for Offering Synthetic Assets

The Securities and Exchange Commission and Commodity Futures Trading Commission issued a joint fine to Abra, a crypto portfolio app that let users get synthetic exposure to traditional markets.

According to the SEC’s release, Abra effectively offered “security-based swaps” to retail investors without the proper registration, in addition to “failing to transact those swaps on a registered national exchange.”

Abra offered a type of “centralized” synthetic asset, where users were able to get exposure to traditional securities like stocks by putting up Bitcoin (BTC) and Litecoin (LTC) as collateral. The system removed or added the coins based on how much the underlying security moved up or down.

According to the SEC’s findings, the feature was introduced in February 2019 to all users, including those in the United States. Conversations with SEC staff led Abra to discontinue the feature shortly after. However, they reintroduced it in May of that year, this time barring U.S. residents from participating.

This appears not to have been enough to avoid scrutiny. Despite moving part of the operations to the Philippines, Abra employees in California designed, marketed and hedged the contracts while also screening the users who were allowed in.

Daniel Michael, chief of the SEC Enforcement Division's Complex Financial Instruments Unit, warned that companies cannot “evade federal securities laws” simply by dealing with non-U.S. retail investors “while conducting crucial parts of their business in the United States.”

The CFTC, on the other hand, focused on how the synthetics were delivered, noting that such contracts can only be sold on “a board of trade designated as a contract market” — that is a licensed derivatives exchange like CME. “Additionally, in soliciting and accepting orders for these contracts, the respondents illegally operated as an unregistered futures commission merchant,” the release noted.

Abra agreed to a cease-and-desist order and settled fines of $150,000 for each agency, for a $300,000 total.

In May 2020, Abra received $5 million from the Stellar Development Foundation.