Another Wyoming Crypto Company Hits Brick Wall With SEC

Wyoming-based American CryptoFed has an ambitious plan to set up a frictionless payment system that will eliminate costly transaction fee. But its run aground against a federal SEC process.

Renée Jean

November 22, 20225 min read

Roping Bitcoin 11 22 22 scaled
(Cowboy State Daily Staff)

By Renée Jean, Business and Tourism Reporter

Another Wyoming-based digital asset company appears to have run into an SEC brick wall. 

American CryptoFed DAO is facing a second administrative action from the U.S. Securities and Exchange Commission, which says the company’s attempt to register its two tokens, Ducat and Locke, is missing an array of basic financial detail.

The SEC has set a hearing time of 10 a.m. Dec. 1 to determine whether the federal agency, which regulates securities, will issue a stop order against the company.

Frictionless Payments

American CryptoFed DAO was Wyoming’s first legally recognized decentralized autonomous organization. It was hailed by the crypto sector at the time as the first legal DAO in the world.

Decentralized autonomous organizations in general use blockchain technology to encode membership decisions into smart contracts, which then govern how the digital assets will function.

In American CryptoFed’s case, it’s using the DAO concept to create a frictionless payment system for businesses and individuals that the company says will eliminate costly transaction fees, like those merchants pay when customers use a credit card. 

The Tokens

As part of this system, American CryptoFed describes two digital assets, the Ducat stablecoin for everyday exchanges, and the Locke token for governance, on its website.

The Ducat stablecoin’s exchange rate will adjust using data like the PCE price index to eliminate deflation and inflation to protect the monetary value of the coin between exchanges.

The Locke token, meanwhile, would have a finite number, which members would use to both ensure the Ducat’s stability and participate in network rules and decisions.

American CryptoFed has already lined up support for its DAO from the Merchant Advisory Group, representing 165 of the largest U.S. merchants, which between them have over $4.8 trillion in annual sales at more than 580,000 locations across the U.S. and online.

The group recently submitted a letter supporting the concept to Wyoming’s Select Committee on Blockchain, Financial Technology, and Digital Innovation Technology.

SEC Complaints

American CryptoFed initially tried to register both of its digital assets as securities last year under Section 12 of the Securities Exchange Act of 1934, but tried to withdraw the application in June of this year.

The Securities and Exchange Commission, however, rejected the withdrawal and issued a subpoena seeking additional details about the company’s finances, how its tokens work and other materials it says were omitted from the initial registration statement.

SEC also said statements within the registration documents conflict with each other. In one place, for example, the company says it’s two digital assets are not securities, but then says they are securities to be registered in another. The entire process, meanwhile, is intended for registering securities, the SEC pointed out.

“Regardless of whether the tokens are securities, one of the statements used (is) false,” SEC wrote in its administrative order.

Frustration With SEC 

In an email to Cowboy State Daily, American CryptoFed Chief Operating Officer Xiaomeng Zhou told Cowboy State Daily he believes the SEC actions are fundamentally unfair.

“The SEC has no legal basis to bring any legal actions against any entity and against any individual with allegations of ‘Unregistered Securities,’ when the actual pathway to registration with the SEC did not ever and does not currently exist,” he said. “All the pending SEC cases with allegations of ‘unregistered securities’ should be unlawful.

“American CryptoFed will make this point loud and clear during our public hearing and legal documents.”

Zhou also indicated that American CryptoFed has many times asked the SEC to provide “precision and guidance” as mandated by the U.S. Supreme Court.

“If CryptoFed prevails, the Crypto Industry will have a better future because American CryptoFed will force the SEC to provide ‘precision and guidance,’ to complete Form S-1 Statement registration,” Zhou said.

Custodia Case Proceeds

American CryptoFed is not the first Wyoming digital asset company expressing frustration with the current regulatory climate.

Custodia, a special purpose depository institution, has filed a lawsuit against the Federal Reserve for what it says has been an inordinately long slow-walk of its application for a master account as a state-regulated bank.

A Wyoming federal judge recently ruled that Custodia can proceed with some of its claims in the case. 

It is rare that cases of this type against the Federal Reserve are allowed to proceed and is a key win for legitimate digital asset companies that are fighting for the right to exist inside existing legal and regulatory frameworks.

The outcome of the case will be precedent-setting for Wyoming’s three special purpose depositories. A win in Custodia’s case will set the stage for more special purpose depositories to exist within the Wyoming’s regulatory space.

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Renée Jean

Business and Tourism Reporter