Court Rules Crypto Mining Devices Are Securities in SEC Case

A U.S. court has decided that crypto mining devices sold by Green United are classified as securities, aligning with the SEC’s allegations.

As reported by Bloomberg Law, Green United failed to persuade a federal court to dismiss a civil fraud case brought by the Securities and Exchange Commission, which claimed the company misled investors.

The lawsuit asserts that the firm’s mining hardware, referred to as “Green Boxes,” constituted a securities transaction.

What constitutes the essence of the fraud?

In March 2023, the Utah-based mining firm Green United was under suspicion for fraudulent activities. The Commission subsequently charged the company with breaching the Securities Act and marketing fake assets totalling $18 million.

The SEC’s filing included comprehensive details about the case, featuring the firm’s founder, Wright Thurston, and the key promoter, Kristoffer Krohn.

Thurston and Krohn marketed their enterprise as a green mining solution, enticing clients to invest in their equipment with promises of monthly returns as high as 50%. The minimum investment was set at $3,000.

The agency concluded that Green United was never involved in green mining. Instead, they channeled client funds into Bitcoin mining (BTC) and retained the profits for themselves.

“Unlike ERC-20 tokens (like GREEN), certain cryptocurrency assets like Bitcoin derive new tokens through mining. In these cases, a new token is minted as a reward for miners who complete algorithms using cryptographic hash functions that validate new transactions on the Blockchain.”

The SEC contends that Green United deceived its investors. The devices were marketed with hosting agreements, in which the firm would oversee the Green Boxes on behalf of investors, guaranteeing substantial profits. The ruling from the U.S. District Court for the District of Utah, presided over by Judge Ann Marie McIff Allen, corroborated the SEC’s position.

According to the SEC, Green United did not engage in token mining despite its assurances to investors. Consequently, the company garnered $18 million from individuals aiming to benefit from crypto mining. Instead of honoring those assurances, they acquired unmined tokens and credited them to investors’ accounts.

This approach was purportedly designed to fabricate a successful mining operation. The SEC stated that the mined currency from GREEN did not possess tangible value.

Green United claims no investors incurred losses

In response to the SEC’s accusations, Green United asserted that no investors suffered financial losses and deemed the agency’s allegations unfounded. The company contended that the SEC was attempting to redefine the law by categorizing hosted mining as a security, which they argue is a common practice even among publicly-traded companies.

In May, the firm’s executives moved to dismiss the SEC’s lawsuit. Thurston and Krohn contended that Congress has scrutinized and dismissed the Commission’s jurisdiction over the cryptocurrency space. Simultaneously, the SEC had supposedly been “ambiguous and inconsistent” in its regulatory approach towards the industry.

“It is fundamentally unjust and unconstitutional for a regulatory body to require an industry to infer the meaning of the law from its jumbled array of disorganized statements, inconsistent applications, ambiguous testimony, and uninformative guidance.”

Court filing

Another point made by Thurston and Krohn is that the SEC’s position on the Green Boxes lacked clarity. The regulator allegedly did not confirm whether the “boxes” qualify as an investment contract or product.

Nevertheless, the judge determined that the defendants had not successfully proven their innocence or countered the agency’s claims.

What other items does the SEC classify as securities?

Aside from mining equipment, the SEC also categorized the sale of NFTs as transactions involving unregistered securities in August. This was highlighted during the indictment of the Impact Theory media company for selling non-fungible tokens (NFTs) as unregistered securities.

Furthermore, the SEC informed OpenSea that NFTs available on its marketplace might be viewed as unregistered securities. The agency also took action against Flyfish Club, LLC for carrying out an unregistered offering of cryptocurrency securities by selling non-fungible tokens.

However, scrutiny of NFTs is considerably less frequent than for tokens. The regulator continues to assert that all cryptocurrencies, except Bitcoin, should be viewed as securities.

SEC clarifies the definition of securities for cryptocurrencies

In designating cryptocurrencies as securities, the SEC relies on the Howey test, an antiquated legal standard established in 1946. Named after the SEC’s landmark case against W.J. Howey, this test determines whether an asset falls under the definition of security. It assesses factors such as initial sales and fundraising efforts, ongoing promises of project development, and the use of social media for promoting the attributes and advantages of its protocols.

However, earlier in September, the SEC, in an amended complaint against Binance, indicated that it never regarded specific tokens as securities but evaluated the comprehensive set of contracts, expectations, and agreements associated with the sale of the assets.

This statement stood in stark contrast to SEC Chairman Gary Gensler’s remarks, who claimed that tokens are considered securities because they involve a group of developers, and the public anticipates profits from their actions. He argued that crypto investors expect to gain from the efforts of these project creators — akin to shareholders of public companies.

This rationale elucidates the SEC’s focus on Green United — the firm proposed investment in the Boxes, with promises of financial returns in exchange.