SEC takes aim at crypto project and its 'market maker' over alleged manipulation

Quick Take

  • The SEC is suing Hydrogen and market maker Moonwalkers for alleged market manipulation as well as unregistered securities offerings. 
  • Though the SEC has sued many projects for unregistered securities offerings, this latest action takes aim at a token distribution via bounty and airdrops rather than an ICO. 

The Securities and Exchange Commission is taking aim at a crypto token for alleged market manipulation, as well as its distribution via bounty and airdrop. 

The SEC announced its case against Hydrogen and market maker Moonwalkers Trading as well as the CEOs of the two firms. The SEC alleges Hydrogen distributed its Hydro token through bounty programs and airdrops in 2018, while also selling to users directly through its trading platform in an effort to fund the Hydrogen project. 

Upon discovering that mass sales of Hydro would depress prices on its platforms, CEO Michael Kane hired Moonwalkers to wash trade the token, creating a veneer of market activity that stabilized its price and increased user interest, the SEC alleged. 

According to the SEC, Hydrogen's actions constitute both market manipulation and, despite Hydrogen's avoidance of an initial coin offering in favor of airdrops and bug bounties, an unregistered securities offering. 

“Companies cannot avoid the federal securities laws by structuring the unregistered offers and sales of their securities as bounties, compensation, or other such methods,” Carolyn Welshhans, of the SEC's enforcement division, said in a statement.

While the SEC has been actively pursuing initial coin offerings since 2017, many in the crypto industry considered airdrops to be an exemption from securities laws. The SEC typically refers to crypto tokens as securities based on the Howey test, which includes the requirement that there be an investment of money. 


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While the Hydro case includes the accusation of market manipulation, over which the SEC has longstanding and clear authority, the SEC's complaint takes pains to suggest that non-sale distributions of tokens can still be considered securities offerings. At one point, the complaint cites an unnamed Hydrogen investor and board who told the SEC that Kane led investors to believe Hydro would have value.

The complaint cites a letter from the investor to Kane as saying: “[a]s everyone has acknowledged that these digital assets [Hydro] may accrete in value over time, your contention that this [the airdrop] was merely a software delivery is tenuous.”

There has been confusion over the SEC's stance on airdrops going back for years. Crypto think tank Coin Center warned against airdrops as an SEC defense back in September 2017, just months after the DAO report opened the door on ICO pursuits.

In February 2020, SEC Commissioner Hester Peirce lamented: "We have even hinted that a token airdrop in which tokens are given out freely might constitute an offering of securities. How is a person supposed to get a network up and running when she cannot even give away the tokens necessary to use the network?"

© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.


About Author

Kollen Post is a senior reporter at The Block, covering all things policy and geopolitics from Washington, DC. That includes legislation and regulation, securities law and money laundering, cyber warfare, corruption, CBDCs, and blockchain’s role in the developing world. He speaks Russian and Arabic. You can send him leads at [email protected].