Business 9 November 2018

Ed Drake

EtherDelta founder faces raps over unregistered securities exchange

The U.S. Securities and Exchange Commission (SEC) has charged the founder of crypto trading platform EtherDelta with running an unregistered securities exchange, in the latest example of the regulator taking direct enforcement action against those who flout securities law.

According to an announcement from the regulator, the platform, which enables trading in ERC-20 tokens as a secondary market, has been operating without authorization from the commission—authorization the regulator says it needs on account of the legal status of the instruments traded on its exchange.

The SEC has been stepping up its oversight of cryptocurrency and token sales, effectively deeming many to fall within legal definitions of a security.

While this is far from clear in all instances, especially given that existing laws speak little to the unique digital assets created by blockchain technology, the enforcement action nevertheless serves as a reminder that it is incumbent on promoters and founders in the first instance to ensure they are compliant.

According to the securities regulator, EtherDelta’s exchange used smart contracts to automatically process, execute and record transactions for assets the regulator said fall specifically within the definition of ‘securities.’

“EtherDelta’s smart contract was coded to validate the order messages, confirm the terms and conditions of orders, execute paired orders, and direct the distributed ledger to be updated to reflect a trade,” the SEC noted, adding that “almost all of the orders placed through EtherDelta’s platform were traded after the Commission issued its 2017 DAO Report, which concluded that certain digital assets, such as DAO tokens, were securities and that platforms that offered trading of these digital asset securities would be subject to the SEC’s requirement that exchanges register or operate pursuant to an exemption.”

The platform hasn’t registered as an exchange with the SEC, nor has it filed for any exemption from the rules with the regulator. As a result, founder Zachary Coburn now faces charges from the commission which could carry criminal sanctions.

For his part, Coburn has already settled with the SEC, paying $300,000 in disgorgement, $75,000 as a penalty fine, and a further $13,000 in prejudgement interest.

The case comes at a time of increasing interest from the SEC in clamping down on unregulated exchanges and those operating outside of U.S. securities law.

Note: Tokens on the Bitcoin Core (SegWit) chain are referenced as BTC coins; tokens on the Bitcoin Cash ABC chain are referenced as BCH, BCH-ABC or BAB coins.

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