Headline:  What is the DEBT box case against the SEC?

Body:  So, we have an interesting one here.   There is a company with the trade name DEBT Box (by their own choice) and there were 18 principals and the company itself who were found guilty of fraud.  They were all halted from doing business and fined $50 Million and a combination of Bitcoin and Ethereum.  What’s interesting here is that the details are so reminiscent of other frauds through the centuries of Western civilization.  Certainly, we should be able to learn something here.

What happened?

Digital Licensing Inc. (hereinafter DEBT Box) was selling “node licenses” to investors (read, victims.).    There is one blockchain where the limited number of authentic validators are given such a license number.   But, this is on a completely different blockchain, and DEBT Box would simply invent the needed number of licenses on their own blockchain.  The entities involved were also accused of acting like unregistered brokers.  Tracy Combs, director of the SEC’s Salt Lake Regional Office, said:

“We allege that DEBT Box and its principals lied to investors about virtually every material aspect of their unregistered offering of securities, including by falsely stating that they were engaged in crypto asset mining,”

The SEC is seeking permanent injunctions, return of ill-gotten gains and civil penalties against the firm.

Really??  People felt secure enough to invest in a company called DEBT Box??

The company entices investors with promises of daily rewards tied to various industries such as real estate, commodities, agriculture, and technology.  As one can surely understand, when the potential of great returns is waved before an  audience, many are desperate or greedy enough to invest.  Fighting against this greed or gluttony (your choice) the SEC has put together some publications for investor education, focusing on the risk of cryptocurrency investments.  Some of the titles include the following:

The Verdict

This one is a little bit different because the SEC is saying that there is actually a fraud that was committed, and whether or not the node licenses were securities or not, is a side issue.  The question that must be asked is what can we learn from this?  I fear that we need to learn a similar set of lessons, chief amongst them is DO NOT INVEST IN SOMETHING YOU DO NOT UNDERSTAND.  I believe that it was Peter Lynch who counselled to not invest in something unless you can illustrate the value proposition with a crayon.  The value proposition here is murky, at best.  You are not validating transactions, so the value is not a reward for this activity.   You are not directly staking a validator, so there is no value proposition there either.  Further, your license lives on a blockchain controlled by a company.  The Coast Guard station hangs fewer red flags when a hurricane is expected.

It strikes me that I should also say a word about unregistered securities.  There are several categories of securities that are unregistered and still kosher with respect to the SEC.  (Details are beyond the scope of this entry, but, they do exist.)  But each one contains several constraints that work to partially replace the requirements of registration with the SEC.  Some are limited by size, some are limited  to who may invest and some offer a very brief form of the lengthy registration.  Outside these very small examples (if memory serves from the CPA exam, there are only 4) all securities MUST be registered with the SEC.

REFERENCES

SEC.gov | SEC Obtains Emergency Relief to Halt Utah-Based Company’s Crypto Asset Fraud Scheme Involving 18 Defendants

SEC freezes assets of DEBT Box, alleging $50M node license ‘sham’ (cointelegraph.com)

SEC freezes assets of crypto mining firm DEBT Box in $50m fraud case By Crypto.news (investing.com)

SEC says court, not jury, should determine security status of Terra’s crypto assets (cryptoslate.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

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