U.S. government sues founder of long-defunct cryptocurrency exchange BitFunder

On February 21, the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) officially filed a lawsuit against Jon E. Montroll, the founder of BitFunder, a Bitcoin-based exchange that has ceased operations.

The SEC issued a press release that day, stating that it had sued Montroll (also known as Ukyo), claiming that BitFunder, operated by the company, was an unregistered securities exchange that deceived users of the exchange and “issued false and misleading statements about unregistered securities products.”

The SEC alleges that BitFunder and its founders defrauded exchange users, “misused their bitcoin,” operated an unregistered securities exchange, and failed to disclose a cyberattack that resulted in the loss of more than 6,000 bitcoins.

In 2013, hackers took advantage of a vulnerability in BitFunder's program code to take 6,000 bitcoins for themselves. To avoid responsibility for the loss of these bitcoins, Montroll denied that the hackers had succeeded and provided SEC investigators with false account balance reports. The total value of the lost bitcoins at the time was $720,000, which is now worth more than $60 million.

The formal complaint filed by the SEC charges Montroll with violating the anti-fraud and registration provisions of the U.S. federal securities laws. The press release states that “the complaint seeks a permanent injunction, disgorgement interest, and penalties.”

On February 21, DOJ also announced that Montroll had been arrested and was in federal custody. DOJ charged Montroll with two counts of perjury and one count of obstruction of justice. Perjury and obstruction of justice carry a maximum sentence of 5 and 20 years, respectively.

Investor protection remains a key focus for the federal government in this lawsuit. Marc Berger of the SEC’s New York Regional Office said:

"Platforms that participate in domestic securities exchange activities, regardless of whether the activities involve digital assets or tokens, must register with the SEC or operate under exemptions. We will continue to focus on such platforms to protect investors and ensure compliance with securities laws."

Since the August hack, withdrawals have been delayed and frozen, and BitFunder ceased operations on November 14, 2013. To make matters worse for the BitFunder hack, U.S. traders were barred from participating and left the platform in droves, driving the exchange into bankruptcy.

At a Senate hearing earlier this month, SEC Chairman Jay Clayton noted that ICO tokens currently monitored by the SEC are likely securities under U.S. law, regardless of how the issuer promotes the token. In December 2017, Clayton mentioned that no ICO had completed token registration with the SEC.