Cryptocurrency Classified as Security by US Department in Landmark HYDRO Founders Case

Key Takeaways:
For the first time, the U.S. Department of Justice (DoJ) has classified a cryptocurrency as a security asset.
Shane Hampton and Michael Kane, founders of Hydrogen Technology’s HYDRO token, were sentenced for market manipulation.
Manipulative practices included the use of an automated bot for wash trades and spoof orders.


Is Cryptocurrency a Security?
LUCKNOW (CoinChapter.com) — In a groundbreaking ruling, the U.S. Department of Justice (DoJ) has classified a cryptocurrency as a security asset for the first time. This decision was made during the sentencing of Shane Hampton and Michael Kane, founders of Hydrogen Technology’s HYDRO token, for engaging in market manipulation.


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On June 25, the DoJ announced that Hampton and Kane had been sentenced for artificially inflating the price of the HYDRO token. The DoJ determined that their sale of HYDRO tokens constituted unregistered investment contracts. Hampton, CEO of Hydrogen Technology, received a sentence of two years and 11 months, while Kane, the company’s head of financial engineering, received a more severe sentence of three years and nine months.
The Mechanics of Manipulation — Bots, Wash Trades, and Spoofing
The court discovered that Hampton and Kane had employed Moonwalkers Trading Limited, a South African firm, to deploy an automated bot for market manipulation. This bot flooded the HYDRO markets with $7 million in wash trades and $300 million worth of spoof orders.
These deceptive practices were designed to entice retail investors into purchasing HYDRO tokens at artificially inflated prices. Through their manipulative efforts, Kane, Hampton, and their accomplices made approximately $2 million in profits over a 10-month period.
In November 2023, Kane pleaded guilty to charges that included conspiracy to commit securities price manipulation and wire fraud. Two co-conspirators, Andrew Chorlain and Tyler Ostern, also pleaded guilty in May 2023.
Hampton’s case made history as the first instance in which a jury trial concluded that a crypto asset constituted security. In February, he was convicted of conspiracy to commit securities price manipulation and wire fraud.
This Is Not The First Case…
While this case marks the first time the DoJ has classified a cryptocurrency as a security asset, the U.S. Securities and Exchange Commission (SEC) has been actively pursuing enforcement actions against various digital assets in recent years.
The Ripple vs. SEC case has been a significant battleground in such cases. This high-profile lawsuit revolved around whether Ripple’s XRP should be considered a security. The SEC argued that Ripple’s XRP sales constituted unregistered securities offerings, while Ripple maintained that XRP is a digital currency, not a security.
In a decision in July 2023, a U.S. court ruled that XRP is not a security when sold on exchanges through programmatic sales. However, the court deemed XRP a security when sold directly to institutional investors, as these sales met the criteria of an investment contract under the Howey Test.
The implications of this ruling extend beyond Ripple and could potentially impact other ongoing and future cases. In 2023, the SEC filed lawsuits against major U.S. centralized exchanges Coinbase and Kraken, alleging their facilitation of trade in unregistered securities.