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Bermudian token disabled by SEC, $6m penalty

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A digital token issued from Bermuda is being permanently disabled, and the company behind it will pay a $6.1 million settlement after the United States Securities and Exchanges Commission said the tokens were an unregistered security.

The penalty fee will be used by the SEC to deal with claims from holders of UnikoinGold who want a refund.

The tokens were launched in 2017 by online e-sports gaming and gambling platform Unikrn Inc, which is headquartered in the US, and raised $31 million in a combination of US dollars and the digital asset ether. About $16 million of that was raised by Unikrn's wholly-owned Bermudian subsidiary Unikrn Bermuda Ltd, from 75 accredited investors.

The SEC this week announced charges against Unikrn Inc for conducting an unregistered initial coin offering of digital asset securities.

Before any proceedings were started, Unikrn agreed to settle the charges by paying the penalty, said to substantially be all its assets, to be distributed to investors through the SEC's Fair Fund. The company did not admit or deny the SEC's findings.

Unikrn was founded in 2014 with backing from investors like Elisabeth Murdoch, daughter of media baron Rupert Murdoch, and actor Ashton Kutcher. It also received financial backing from Mark Cuban, an American venture capitalist and owner of NBA franchise, the Dallas Mavericks.

In a statement, the SEC said its order “finds that Unikrn offered and sold UKG as investment contracts, which constituted securities, yet failed to register the offering or qualify for an exemption”.

It said Unikrn had agreed to pay the penalty fee, and to disable UnikoinGold, publish notice of the order, and request the removal of UKG from all digital asset trading platforms.

Unikrn, in a statement on the UnikoinGold website said: “Despite the growth of the Unikrn platform since 2017, we have been working to establish regulatory clearance in the US for UKG. We invested in the best legal advice we could find and continue to openly work with regulators. Our hands were tied in terms of what we could and couldn't do without regulator guidance.

“After UnikoinGold's token sale, the SEC established guidelines which, applied retroactively, raised many questions with regards to the future of UKG. Unikrn's priority was in growing and innovating the Unikrn platform while trying to find common ground with the SEC that would allow us to promote the merits of UKG.

“Short of that, our other option was to reach settlement on UKG's past and discontinue it moving forward so that our energies could be effectively directed.”

The company said it could now focus on “continuing to build our industry-leading business”.

It added: “Although this agreement also means Unikrn will need to discontinue support for UnikoinGold, it won't stop us from innovating on payments and on the blockchain”.

It said it would continue to offer “regulator-approved wagering and other services” with major currencies including fiat currencies, bitcoin, ethereum, dogecoin, and ripple.

Regarding the order, Kristina Littman, chief of the SEC enforcement division's cyber unit, said: “The securities registration and exemption framework is designed to ensure investor protection and access to material information, while also facilitating capital formation. Failure to follow this framework harms investors and our markets.

“This resolution allows us to return substantially all of Unikrn's assets to already-harmed investors and includes measures to prevent future sales to retail investors, including the disabling of the tokens.”

The Royal Gazette asked the Government, through its Fintech Unit, if it believed the case will affect future digital coins or tokens issued from Bermuda.

Denis Pitcher, of the Fintech Unit, said the UnikoinGold initial coin offering predated Bemuda's digital asset and Digital Asset Issuance Act regulations.

He said: “It was one of the reasons touted as why Bermuda created such regulations so as to provide clarity to our stance and the requirements for compliantly issuing digital assets and conducting digital asset related business in Bermuda.”

He also noted that SEC commissioner Hester Pierce said: “We should strive to avoid enforcement actions and sanctions, however, that enervate innovation and stifle the economic growth that innovation brings. I believe that this action and its accompanying sanctions will have such consequences.”

Mr Pitcher said issuing digital assets or operating a digital asset business from Bermuda does not exempt a business from the laws of other jurisdictions in dealing with that jurisdiction's citizens. He added that Commissioner Pierce had said Unikrn is alleged to have not properly followed securities registration laws for US citizens, but was not alleged to have engaged in any fraud in doing so.

Law firm Conyers, which was involved in the launch, said its policy was not to comment on any client matters.

Crypto case: the US Securities and Exchanges Commission this week announced charges against Unikrn Inc for conducting an unregistered initial coin offering of digital asset securities (File photograph)

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Published September 18, 2020 at 8:00 am (Updated September 18, 2020 at 2:08 pm)

Bermudian token disabled by SEC, $6m penalty

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