SEC Sues 2017 ‘Zombie Coin’ to Expand its Regulatory Boundaries

Another day, another loaded SEC “regulation by enforcement” action.

The SEC is suing startup founder John Joseph Roets and three entities he controls — Dragonchain, the Dragonchain Foundation and The Dragon Company — for raising $16.5 million in unregistered cryptoasset securities offerings.

Open source blockchain Dragonchain was originally developed as Disney’s private blockchain platform in Seattle in 2016. The court filing, in the US District Court for the Western District of Washington, charges the defendants with violating the Securities Act of 1933.

The SEC claimed both the 2017 presale and the Initial Coin Offering (ICO) of Dragon tokens (DRGN) were unregistered crypto asset securities offerings that allegedly raised approximately $14 million from over 5,000 investors.

Another $2.5 million worth of DRGN was allegedly offered and sold between 2019 and 2022 “to cover business expenditures and market Dragonchain technology.”

This isn’t about Dragonchain so much is it’s about the SEC trying to dredge up old cases to set precedent to expand its jurisdictional boundaries beyond what Congress intended.

Because there are no specific federal laws governing crypto, the SEC and the Commodity Future Trading Commission have taken ambitious steps to regulate crypto, and this is yet another one of those steps. 

As Bill Hughes, an attorney at ConsenSys notes, “Even though Dragonchain is a 2017 zombie coin, these cases allow the SEC to develop precedent that can be used to regulate the broader space. So this isn't really about this particular token necessarily.”

The recent Supreme Court ruling in West Virginia v EPA gives a clear signal that regulators shouldn’t act beyond the scope of their legislative mandate. As we have written, the crypto industry needs to get out in front of these actions and push back.