Sunday, November 11, 2018 04.15AM / By Leigh Cuen and Nikhilesh De of Coindesk / Image Credits: YouTube
The Securities and Exchange Commission's (SEC) settlement with the
founder of EtherDelta is likely the first of many enforcement actions to come
against crypto token exchanges.
recently, the SEC's scrutiny of the cryptocurrency industry largely focused on
projects and teams that raised money through initial coin offerings (ICOs) in
possible violation of securities laws. But a person familiar with the
SEC's thinking told CoinDesk Thursday that crypto trading platforms have
become a significant priority for the agency's enforcement division.
such, the news that the SEC had charged EtherDelta founder Zachary Coburn with
operating an unregistered securities exchange can be seen as a shot across the
bow of token-trading platforms.
this point, if you're doing an exchange of crypto assets, dealing with U.S.
persons, you probably need to get either a no-action letter or get clarity from
counsel about whether you are implicating securities laws,"
said Andrew Hinkes, an adjunct professor at the New York University School
while the EtherDelta action was the SEC's first against a crypto exchange,
Hinkes told CoinDesk: "I'm surprised it took this long."
the case shows that even if so-called decentralized exchanges (DEXs) cannot be
easily shut down, that does mean no one will be held liable for their
activities. Without admitting or denying the charges, Coburn agreed to pay a
total of $388,000 in penalties, disgorgement and interest under the
tells you that an exchange that used a distributed set of nodes instead of a
centralized server isn't going to be treated any differently," Hinkes
said. "Just because you make it and then it gets operated by a
decentralized network of others doesn't mean that any prospective
responsibility or liability is gone. It's just possibly relocated."
notably, the action was taken against Coburn even though he left EtherDelta in
late 2017. The trades of ethereum-based tokens on the platform cited by SEC
took place between July 12, 2016 and December 17, 2017, around the time of
doesn't matter whether you sell the business or operated it a year ago or a few
years ago," said Preston Byrne, a partner at the law firm Byrne &
Storm, P.C. "American securities laws are going to be enforced."
the other hand, it's also telling that Coburn's penalty was merely a
low-six-figure fine. He wasn't banned from participating in capital markets, in
part because he cooperated with the SEC, which wants other individuals running
or planning to run similar platforms to reach out to the agency first.
entrepreneur, in this case, cooperated fully with the commission, which is
often a good idea," Byrne said. "It shows the SEC is willing to work
with people who are willing to work with them."
back, since the token sale craze of 2017, numerous DEX platforms have emerged
where ethereum-based assets are often swapped without oversight from any
to DappRadar, the leading DEX platform IDEX
had roughly 1,401 users over the past 24 hours. With regards to EtherDelta
specifically, there were roughly 1,079 trades on EtherDelta over the past 24
hours, about 11 percent less than in the previous 24-hour period.
the SEC hasn't clarified which tokens that traded on EtherDelta it considered
securities, this action hinted at who regulators consider liable for
purportedly decentralized technologies.
of the SEC order and how it relates to the most popular form of ICO token, the
ERC-20, Hinkes said:
says that he [Coburn] founded a company, wrote and deployed the smart contract
and exercised complete and sole control over the operations. Based on that, he
should have known that his actions would contribute to the violation of the
Hinkes' mind, this opens up a variety of legal questions for developers
contributing to ethereum and bitcoin. It's entirely possible that merely writing
and executing code could make technologists vulnerable to legal action in the
future if they neglect to create limitations for how that software is used, he
could have elected to filter out certain tokens," Hinkes said. "By
not doing so, they opened themselves up for everything, including securities
that are issued under ERC-20."
of which specific tokens are eventually deemed by courts to be unregistered
securities, Stephen Palley, a partner at the Washington, D.C.-based law firm
Anderson Kill, told CoinDesk his reading of the order implies the majority of
EtherDelta's volume came from "the purchase and sale of unregistered
Fight or flight
Byrne's point of view, the SEC's enforcement action could inspire more
cryptocurrency companies to avoid having operations in the United States.
are hubs overseas, Singapore, England, where the laws are much friendlier
toward ICOs and tokens," Byrne said. "The principal task of
cryptocurrency entrepreneurs will be 'how do we maximize our opportunities in
those jurisdictions while limiting our exposure to American regulators, and
also compliance with American laws, as we conduct business overseas?'"
the U.S.-based DEX startup AirSwap is strategizing for the opaque regulatory
climate by partnering with licensed securities dealers and avoiding order
other platforms, AirSwap doesn't engage in exchange activities–it has no order
book, no order matching, and no transaction fees," AirSwap co-founder
Michael Oved told CoinDesk. "Our approach has been to be proactive in
seeking advice and to be transparent with regulators."
exchanges operating in the U.S., including AirSwap's rival Everbloom, avoid
charging traders fees in an effort to reduce legal risks. Hinkes said this
recent order may undercut such approaches.
doesn't appear that taking a fee is relevant to their analysis of whether
EtherDelta was acting as an exchange that should have registered or proceeded
under an exemption, or not," Hinkes said.
much is certain, the SEC is far from finished with its sweep
of the industry, which Palley compared to a five-act play, saying:
got dozens and dozens of investigations going on. I think we'll see more press
releases, more enforcement actions. This is certainly not the end of anything.
This is maybe the end of Act 2 and the beginning of Act 3."
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