The Securities and Exchange Commission today announced a settlement with esports-betting cryptocurrency firm Unikrn over what the SEC deemed a violation of securities laws. Unikrn will shutter its UnikoinGold cryptocurrency token and pay a $6.1 million fine, which amounts to all of the company’s assets, but will not close its doors.
So ends one experiment in gaming, gambling, and esports that evidently stepped over the line of what the federal government will permit when companies issue cryptocurrencies to the public. While the fine is heavy, the SEC did not accuse Unikrn of any fraud.
The SEC said this was one more in a growing number of enforcement actions related to initial coin offerings (ICOs). While Unikrn thought it was operating within the law, its action landed in a legal gray area the SEC decided crossed the line. Other companies that held ICOs in the U.S. are likely to face similar difficulties.
Unikrn has a tech celebrity CEO in Rahul Sood, who was an investor in companies at Microsoft and the steward of the Voodoo gaming brand at HP. Rahul and his brother Ravi started Voodoo PC in Calgary, Canada in 1991 to make gaming rigs for PC players. They specialized in making the coolest and most expensive machines and sold the company to HP in 2006. Rahul left in 2010 and started Microsoft Ventures in 2013. A year later, he left to start Unikrn with cofounder Karl Flores, and they got billionaire Mark Cuban to invest.
Unikrn’s idea was to give gamblers, esports fans, and gamers a currency for wagering and trading. Unikrn began as a cryptocurrency startup in 2015 and raised $31 million through its offering of the UnikrnGold token in 2017, promising it would facilitate a secondary trading market for the tokens. The SEC ruled that the company was selling unregistered securities that required SEC approval. Unikrn had obtained a license for gambling from the Isle of Man in the United Kingdom, but that did not provide a shield in the U.S.
Under the settlement, Unikrn will permanently disable its blockchain-based token, which it had integrated into its product offerings, and pay the penalty. In effect, the SEC is forcing the company to cease operations because of an improper securities offering. Unikrn did not admit or deny guilt in the SEC settlement, and one commissioner voiced dissent.
“While many SEC enforcement actions in this space include allegations of fraud, Unikrn falls within the narrower category of token issuers charged only with violating Section 5 of the Securities Act,” said SEC Commissioner Hester Peirce. “In other words, Unikrn is alleged to have offered and sold its tokens in an unregistered offering and in a manner that did not qualify for an exemption; it is not alleged to have engaged in any fraud in doing so.”
She acknowledged that registration violations are serious but also warned against stifling innovation.
“Our enforcement actions can serve to deter such violations and protect harmed investors,” Peirce 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.”
“The challenge of discerning a clear legal line is especially difficult with respect to new forms of business and novel technologies,” Peirce said. “Entrepreneurs may be forced to choose between unpalatable options: expending their limited capital on costly legal consultation and compliance or forgoing their pursuit of innovation due to fear of becoming subject to an enforcement action. A regulatory safe harbor could resolve this unhappy dilemma.”
Sood took to social media to address the public and thanked Peirce for her support.
“I often share our team wins … on Unikrn,” said Sood in a post on Facebook. “Today is a little different, but I couldn’t be more proud of our team. As an entrepreneur, we face such challenges head-on, and we’ll continue to be relentless. As many of you know, Unikrn announced a mutually agreed-upon settlement regarding UKG. You can read more on our UnikoinGold website. In the meantime, I appreciate the view of SEC Commissioner Hester Peirce.”
After UnikoinGold’s token sale in 2017, the SEC established guidelines that, applied retroactively, raised many questions around the future of UKG.
“We spent months working with the SEC to come to a solution that was about moving the business forward,” Unikrn said in a statement. “The common ground we found requires Unikrn to completely stop supporting UKG and help provide a fund for purchasers of UnikoinGold. This gives us clearance to focus on continuing to build our industry-leading business.”
Unikrn said in its post that it would continue to offer regulator-approved wagering and other services with major currencies, including Fiat currencies, Bitcoin, BitcoinCash, Ethereum, Dogecoin, GUSD, USDC, PAX, BUSD, Ripple, and others. Going forward, Unikrn will also consider other options internationally, based on community feedback.
The SEC will be establishing and operating a Fair Fund for token holders who would like a refund and will oversee this process. The SEC will provide further information regarding making a claim at a later date.