Applying Howey to the Blockchain: Crypto Fraud and the Anonymity Gap

Since its launch in 2009, Bitcoin has ballooned into an asset currently fluctuating around a $1.34 trillion market cap and has inspired the creation of thousands of tokens ranging from utility tokens like Ethereum’s “ETH” to stablecoins like “USDC.” (CoinMarketCap; Edan Yago, Forbes). Unlike traditional currencies, which depend on a central authority such as a bank or government to validate and record transactions, cryptocurrency (“crypto”) operates on a decentralized blockchain that allows for secure, direct transactions that are verified through a distributed ledger and network consensus. (Stephanie Susnjara, IBM). Despite these legitimate uses, the Securities and Exchange Commission (“SEC”) has warned that some tokens serve as vehicles for “pump and dump” schemes, in which fraudsters spread false information to drive up a coin's price before selling their holdings, leaving other investors with a loss. (SEC). One such scheme came to light in 2024, when Shane Hampton (“Hampton”) was convicted at a federal jury trial of conspiracy to commit securities price manipulation and wire fraud for his role, alongside Hydrogen Technology (“Hydrogen”) CEO Michael Kane (“Kane”), in manipulating the price of the HYDRO token. (DOJ). Now on appeal to the Eleventh Circuit, Hampton and Kane argue that HYDRO was not an “investment contract” because its value derives from its utility within Hydrogen’s ecosystem as opposed to any profit derived from the efforts of others. (Carolina Bolado, Law360). This post briefly unpacks Hydrogen’s scheme and Hampton’s conviction before focusing on the appeal, arguing that however the Eleventh Circuit rules, its holding will primarily reach well-documented organizations while smaller, anonymous pump-and-dump schemes remain far more difficult to prosecute.

To understand the court’s ruling in Hampton, one must first understand the underlying scheme. In February 2018, Hydrogen minted roughly eleven billion HYDRO tokens and retained about seventy percent of the supply, which it planned to offload with "as minimal impact on the price as possible." United States v. Hampton, No. 23-CR-20172-PAS, 2024 U.S. Dist. LEXIS 101998, at *6 (S.D. Fla. June 7, 2024). To manufacture the appearance of high trading volume, Hampton moved tokens into new wallets to “trick” exchange code into inflating supply and further coordinated with co-conspirators to strategically trade HYDRO among themselves. Id. at *7. In October 2018, Hydrogen hired Moonwalkers Trading Ltd. (“Moonwalkers”), a South African firm whose automated trading bot executed trades between wallets that involved no real beneficial exchange in ownership and no actual intent to fill the order as placed. Id. at **7–12. All told, the scheme placed more than $300 million in spoof trades and around $7 million in wash trades, luring in investors and larger exchanges while Hydrogen executives extracted about $2 million. (DOJ; Carolina Bolado, Law 360). However, none of this conduct would constitute securities manipulation under 15 U.S.C. § 78i(a) unless the Government could prove that HYDRO was a security.

Convicting Hampton first required the Government to clear a hurdle no trial court had cleared before: proving that crypto is a security. The Securities Exchange Act defines a security to include an “investment contract” under 15 U.S.C. § 78c(a)(10), which the Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) construed as a common enterprise with an expectation of profit derived from the efforts of others. SEC v. W.J. Howey Co., 328 U.S. 293, 298–99 (1946). However, crypto does not fit neatly into this framework, and previous applications of the Howey test have only muddied the waters. (Cornell Law School). In Hampton, the profit expectation prong proved decisive: the Government showed that Hydrogen published a development plan, promoted the token’s uses, and offered investor testimony that they “invested in HYDRO with the intent to earn a profit after observing HYDRO's increased trading volume.” Hampton, 2024 U.S. Dist. LEXIS 101998, at *6 n.8. On February 7, 2024, the jury convicted Hampton on both conspiracy counts, and, by special verdict, found HYDRO to be a security that Moonwalkers’ bot had unlawfully manipulated. Id. at *5. Because investors testified that they bought precisely because of the artificial, bot-driven volume, their profit expectation traced back to Hydrogen’s own conduct—the manipulation thus supplied evidence supporting the Government’s Howey theory. Id. at *6 n.8.

On appeal to the Eleventh Circuit, Hampton and Kane argue that HYDRO was a utility token, not an investment contract, and therefore not a security under 15 U.S.C. § 78c(a)(10). Hampton argued that even if buyers hoped that the token would appreciate, its value did not derive from the efforts of others as the Howey test requires. (Carolina Bolado, Law360). Hampton’s attorney compared HYDRO to a Lionel Messi jersey or a rare baseball card—both subjective bets on future appreciation—and insisted the price moved on “pure market speculation” with no “objectively reasonable expectation of profit.” (Martina Barash, Bloomberg Law). Kane’s attorney pushed a similar theory, emphasizing HYDRO’s usefulness to developers within Hydrogen’s ecosystem—an argument premised on United Housing Foundation, Inc. v. Forman’s holding that purchases driven by a desire to use an item are not securities. (Carolina Bolado, Law360). The Eleventh Circuit panel questioned the defense about why individuals would purchase the token if not for investment, and observed that Hydrogen gave consumers the impression that there was some inherent value by building an ecosystem where the tokens could provide further use. (Martina Barash, Bloomberg Law). The Government argued that the Howey test is satisfied by the objective evidence: Hydrogen’s public development plan, its promotion of the token’s uses, and its work integrating HYDRO into other platforms that would attract more investors. (Carolina Bolado, Law360).

That objective evidence is what made Hampton provable—not the manipulation itself, but the public record Hydrogen left behind. Because Howey asks whether investors expected profit from the efforts of others, each of those documented acts supplied the Government’s missing link. W.J. Howey Co. 328 U.S. at 298–99. Hydrogen’s paper trail let the Government tie investors’ profit expectations to Hydrogen’s own conduct as opposed to the “pure market speculation” Hampton’s attorney invoked. Therein lies crypto’s structural vulnerability: the technology is built for pseudonymity, letting an operator mint a token from an anonymous wallet, route manipulative trades through an offshore firm like Moonwalkers, and promote it behind an alias, all without attaching a name or plan to the scheme. (Allie Grace Garnett, Investopedia). Those features make pump and dump schemes cheap to run and hard to trace, and they also complicate the Government’s proof, because anonymity makes it harder to connect investors’ expected profits to the efforts of a promoter or third party. See W.J. Howey Co. 328 U.S. 293 at 298–99 (profits must come “solely from the efforts of the promoter or a third party”) (emphasis added). Strip away the public documentation and there is no promoter to point to—the anonymity that makes crypto a relatively simple scam is also what makes those scams difficult to prosecute as securities fraud.

Hampton is the first case in which a criminal jury found, beyond a reasonable doubt, that crypto was a security, and it shows that securities law can reach crypto fraud—but only when the fraudster leaves fingerprints. Contrary to Hydrogen’s public enterprise, the SEC warns that fraudsters often hide their true identities, and it can be difficult to track them down, making it “harder for fraudsters to be held accountable.” (SEC). Until enforcement can reach the fraudsters who never surface, Hampton's practical reach may remain narrow, irrespective of whether the Eleventh Circuit affirms.