DoJ Sentences HYDRO Founders In First Ruling That A Cryptocurrency Is A Security

For the first time, the U.S. Department of Justice has found that a cryptocurrency comprises a security asset.

On June 25, the DoJ announced it had sentenced Shane Hampton and Michael Kane for manipulating the price of Hydrogen Technology’s HYDRO token. The department also found that the pair’s sales of HYDRO constituted unregistered investment contracts.

Hampton, Hydrogen Technology’s CEO, and Kane, the company’s head of financial engineering, were sentenced to two years and 11 months and three years and nine months, respectively.

“Shane Hampton, Michael Kane, and their co-conspirators defrauded investors by using a trading bot to manipulate the price of their company’s cryptocurrency,” said Nicole Argentieri, head of the Justice Department’s Criminal Division. “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.”

The pair were found to have hired Moonwalkers Trading Limited of South Africa, a third-party firm, to use an automated bot to flood the HYDRO markets with $7 million in wash trades and more than $300 million worth of spoof orders.

“These manipulative trades were designed to, and did, fraudulently induce retail investors to purchase HYDRO,” the DoJ said. “Through the artificially inflated prices that resulted from their manipulation efforts, Kane, Hampton, and their co-conspirators made approximately $2 million in profits from selling HYDRO over roughly 10 months.”

Kane pleaded guilty to charges of conspiracy to commit securities price manipulation, conspiracy to commit wire fraud, and wire fraud in November 2023. Two co-conspirators, Andrew Chorlain and Tyler Ostern, pleaded guilty to the same charges in May 2023.

Hampton was convicted of conspiracy to commit securities price manipulation and conspiracy to commit wire fraud in February. Hampton’s case was the first in which a jury trial found a crypto asset to comprise a security.

Crypto securities

While the case comprises the first instance in which the DoJ has found a crypto asset to comprise a security asset, the U.S. Securities and Exchange (SEC) has brought numerous enforcement actions seeking to characterize digital assets as securities in recent years.

In 2023, the SEC brought lawsuits against top U.S. centralized exchanges Coinbase and Kraken, alleging that the platforms facilitate trade in unregistered securities, including Cardano (ADA), Solana (SOL), Polygon (MATIC), Cosmos (ATOM), Filecoin (FIL), and Internet Computer (ICP).

Coinbase vowed to fight the charges in court, and has also filed legal action against the SEC for failing to abide by its formal rulemaking process. While Kraken is also seeking to battle the SEC in court and filed a motion to dismiss in February, the judge overseeing the case recently indicated an inclination toward denying the motion.

Notably, the SEC reportedly backed down on its investigation into whether Ethereum is a security last week. The news coincides with the SEC approving 19b-4 filings from spot Ether ETF applicants, with the SEC expected to issue final approval of their S-1 registration statements before fall.

The price of ETH is down 5% in the past seven days, according to The Defiant’s crypto price fees.

Related: Gensler Rattles DeFi With Suggestion PoS Coins are Securities