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SEC Charges Justin Sun for Unregistered Crypto Security Offerings

The US SEC charges Justin Sun and his companies for unregistered offers and sales of TRX and BTT, market manipulation of TRX, and undisclosed compensation to celebrities for promoting TRX and BTT.

The U.S. Securities and Exchange Commission (SEC) filed a complaint on Wednesday against Justin Sun, a prominent Chinese-born crypto entrepreneur, and three of his wholly-owned companies. Sun and his companies allegedly offered and sold TRX and BTT as investments through multiple unregistered "bounty programs", which purportedly instructed individuals to advertise the tokens on social media, encourage users to join Tron-related Telegram and Discord channels, and establish BitTorrent accounts to receive TRX and BTT distributions. Sun's BitTorrent Foundation and Rainberry are also charged with offering and selling BTT in unregistered monthly airdrops to investors who bought and held TRX in Tron wallets or on participating crypto asset trading platforms, including in the United States.

Additionally, the SEC accuses Sun of "orchestrating a scheme to artificially inflate the apparent trading volume of TRX in the secondary market." He allegedly directed his employees to engage in more than 600,000 wash trades of TRX between two crypto asset trading platform accounts under his control, with between 4.5 million and 7.4 million TRX wash traded daily. Sun provided a significant supply of TRX to carry out this scheme and sold TRX into the secondary market, generating proceeds of $31 million from illegal, unregistered offers and sales of the token, the regulator alleges.

Eight public figures, including Lindsay Lohan, Jake Paul, DeAndre Cortez Way (Soulja Boy), Austin Mahone, Michele Mason (Kendra Lust), Miles Parks McCollum (Lil Yachty), Shaffer Smith (Ne-Yo), and Aliaune Thiam (Akon), were also charged with unlawfully promoting TRX and BTT without disclosing their compensation or the amount received. According to the regulatory agency, all but two celebrities, namely Soulja Boy and Mahone, agreed to pay nearly $400,000 in penalties, disgorgement, and interest to settle the allegations, although they did not acknowledge or deny the investigation's findings.

Following the SEC's allegations release, Tron Network's native TRX token, also known as Tron, plummeted by 13%, according to CoinDesk data. TRX's current price is $0.065799, with a 24-hour trading volume of $410.27 million, 10 million shorter than on Wednesday. Other assets related to Sun also took a hit, with Sun token (SUN) and just (JST) sliding over 8%, and Huobi (HT) falling by 10%.

The TRX token makes up a significant portion of the reserves at Huobi Global crypto exchange, where Sun is an adviser and allegedly a shareholder. TRX represents 18% of the reserves at Huobi, while the exchange's own coin, HT, accounts for another big chunk of the reserves. Combined, TRX and HT make up about 41% of the platform's reserves. The fact that Huobi holds a significant number of native tokens might raise doubts about the exchange's stability, especially as the industry is still reeling from the collapse of FTX. The crypto markets are now more cautious about centralized exchanges' dependency on native tokens after FTX case.

Huobi said that it has a strong and healthy reserve pool in place to deal with any risks associated with the concentration of HT and TRX in its asset reserve. Sun injected $100 million of stablecoins into Huobi in January to alleviate stability concerns and another $100 million earlier this March, after a sudden drop in HT's value. Huobi achieved $11 billion of monthly trading volume in February this year, although its clean-reserve ratio is the lowest among the eight exchanges listed by the digital asset data provider.

Despite the SEC's allegations, Sun remains confident that the complaint "lacks merit". On Thursday, he took to Twitter to suggest that the SEC's current regulatory framework for digital assets is still in its nascent stages and needs more development. He further stated his readiness to work alongside regulatory authorities worldwide to create transparent standards for governing and collaborating with the cryptocurrency industry.

The SEC's charges against Justin Sun and his companies are the latest example of the regulatory body's crackdown on the cryptocurrency industry. The SEC has targeted several prominent figures and companies in the industry over allegations of securities fraud and the unregistered sale of securities, including Ripple Labs, LBRY, Binance, Terraform, and Coinbase. Often SEC faces criticism for not providing clear guidance on compliance rules and for applying a "punishing" rather than a "guiding" approach.

On the other hand, the unregistered offers and sales of securities, deceptive practices like wash trading, and paid celebrity endorsements to manipulate the market are serious concern that definitely needs to be addressed. We continue to observe how the industry and regulators try to find the middle ground.