Crypto Under the Gavel: DOJ Declares HYDRO a Security

In a landmark decision, the U.S. Department of Justice (DoJ) has for the first time classified a cryptocurrency, the HYDRO token, as a security. This pivotal ruling accompanied the sentencing of Shane Hampton, CEO of Hydrogen Technology, and Michael Kane, the firm’s head of financial engineering, for their roles in manipulating the token’s market prices.

On June 25, the DoJ delivered its verdict, sentencing Hampton to two years and 11 months and Kane to three years and nine months in prison. Their crime involved the orchestration of artificial price inflations through the use of an automated trading bot, which executed $7 million in wash trades and placed spoof orders totaling over $300 million.

Nicole Argentieri, head of the Justice Department’s Criminal Division, commented on the case: “Shane Hampton, Michael Kane, and their co-conspirators defrauded investors by using a trading bot to manipulate the price of their company’s cryptocurrency. For the first time, a jury in a federal criminal trial found that a cryptocurrency was a security and that manipulating cryptocurrency prices was securities fraud.”

This manipulation scheme led the accused and their accomplices to gain approximately $2 million in profits by selling HYDRO at these inflated prices over a period of about 10 months.

The legal ramifications of this case extend beyond the immediate actors. Moonwalkers Trading Limited of South Africa, the third-party firm hired to implement the fraudulent trading strategies, played a critical role in facilitating the scheme.

In addition to Hampton and Kane, co-conspirators Andrew Chorlain and Tyler Ostern also faced the music, pleading guilty to charges of conspiracy to commit securities price manipulation, conspiracy to commit wire fraud, and wire fraud earlier this year.

This case marks a significant milestone in cryptocurrency regulation. It is the first instance where the DoJ has actively determined a crypto asset to be a security, building upon previous efforts by the U.S. Securities and Exchange Commission (SEC) to classify various digital assets under similar scrutiny.

The SEC has been particularly active, bringing enforcement actions against major exchanges like Coinbase and Kraken for facilitating trades in what it deems unregistered securities. These actions underscore a growing trend toward stricter regulatory oversight in the crypto sector, evidenced by recent legal challenges and court rulings.

Moreover, in a somewhat related development, the SEC has stepped back from its investigation into whether Ethereum constitutes a security. This decision aligns with the agency’s recent moves to process 19b-4 filings from spot Ether ETF applicants, signaling potential final approvals before the autumn.

As the boundaries of cryptocurrency and traditional securities law continue to intersect and blur, this case serves as a precedent-setting moment, likely influencing future regulatory and legal landscapes in the digital asset space.