This past week, Shane Hampton and Michael Kane were sentenced in United States District Court, Southern District of Florida for their role in developing the cryptocurrency token, HYDRO and conspiring with others to manipulate its price. The case is noteworthy because, according to Principal Deputy Attorney General, Nicole Argentieri, “for the first time, a jury in a federal criminal trial found that a cryptocurrency was a security, and the manipulating cryptocurrency prices was securities fraud.” (

The Hydro Token: A Closer Look

A review of the evidence indicates that in 2018, Hydrogen Technology minted HYDRO and distributed these tokens as follows:

  • 35% to the repository (akin to a protocol treasury).
  • 26% to the current Company developers; and
  • 24% to third-party developers via airdrops.

An airdrop is the process of sending tokens to a user’s crypto wallet (similar to an account) based on preset criteria. Projects often choose airdrops hoping recipients will engage with the project, thus promoting broader user adoption.

According to prosecutors, Kane, Hydrogen Technology’s co-founder and CEO, along with Hampton, the company’s Head of Financial Engineering, contracted with Moonwalkers Trading Limited (Moonwalkers), a South African firm, to artificially influence HYDRO’s price on a U.S.-based cryptocurrency exchange.

From October 2018 to April 2019, Moonwalkers employed an automated trading bot to place orders. This operation involved approximately $7 million in wash trades and over $300 million in spoof trades for HYDRO.

According to the indictment, the scheme aimed to deceive retail investors into purchasing HYDRO tokens. By artificially inflating prices through these manipulative practices, Kane, Hampton, and their associates profited around $2 million from HYDRO sales over a period of about 10 months.

The Regulatory Landscape: A Foggy Terrain

While arguably, it should have been clear that this type of market manipulation was unlawful, it is important to remember that the cryptocurrency regulatory landscape remains unclear and confusing and was especially so in 2017-2018.

When HYDRO was initially airdropped in 2018, the crypto regulatory landscape was a complete black box. Before 2017, the SEC had not publicly classified crypto as securities. The Commodity Futures Trading Commission had designated only certain crypto as commodities. The SEC’s first official crypto pronouncement came on July 25, 2017, following The DAO hack. The DAO, a crypto hedge fund launched in April 2016, raised over $100 million in an ICO. In June 2016, a hacker exploited The DAO’s smart contract, redirecting about $50 million. The SEC issued The DAO Report in July 2017, emphasizing that U.S. federal securities law might apply to distributed-ledger activities, regardless of organizational form or technology used.

The DAO Report determined that The DAO tokens were securities under the Howey test from SEC v. W.J. Howey Co. (1946). The Howey test, established by the U.S. Supreme Court is used to determine whether a financial instrument is a security. SEC v. Sg Ltd., 265 F.3d 42. The test includes four components:

  1. An investment of money
  2. In a common enterprise
  3. With an expectation of profits
  4. The expectation of profits is derived solely from the efforts of others. SEC v. ETS Payphones, Inc., 408 F.3d 727.

The DAO Report clarified that certain equity-like assets sold publicly would be considered securities. However, it left uncertainty about assets not clearly functioning as equity or not issued in an ICO.

It is against this cloudy regulatory environment that Kane and Hampton launched HYDRO and promoted it.


As it is often the case, it is unfortunate that Kane and Hampton did not consult with experienced white-collar criminal or regulatory counsel prior to hiring Moonwalkers to promote HYDRO through what should have been, at a minimum, a highly suspect and potentially criminal scheme — akin to old school pump and dumps schemes.

There are some fascinating filings in this case, well worth exploring by anyone interested in having a greater understanding of the evolving legal landscape of cryptocurrencies, especially Prof. Del Wright’s expert report. For those interested, we have curated some of the filings in that case that we think may be instructive.

US v. Kane

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