08 Nov SEC charges EtherDelta for running unregistered securities exchange
The Securities and Exchange Commission (SEC) today assessed penalties against Zachary Coburn, founder of EtherDelta, a digital “token” trading platform. The SEC had charged the company with operating as an unregistered national securities exchange.
The settlement is the first against a cryptocurrency exchange as part of stepped-up SEC enforcement of regulations covering the cryptocurrency marketplace.
EtherDelta allowed trading of ICO tokens
EtherDelta first launched in 2016 as an online platform for secondary market trading of ERC20 tokens typically issued in Initial Coin Offerings (ICOs).
“EtherDelta had both the user interface and underlying functionality of an online national securities exchange and was required to register with the SEC or qualify for an exemption,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.
According to the SEC news release:
“EtherDelta provided a marketplace for bringing together buyers and sellers for digital asset securities through the combined use of an order book, a website that displayed orders, and a “smart contract” run on the Ethereum blockchain. 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 says. 3.6 million orders for ERC20 tokens were handled by the cryptocurrency exchange in contradiction of existing securities laws.
The majority of tokens issued through ICOs were deemed “digital asset securities” by the SEC in a 2017 DAO Report and therefore governed by securities regulations.
SEC wrestles with how to regulate cryptocurrencies
Because the technology is so new and evolving so fast, the SEC and other regulators around the world are struggling to regulate cryptocurrencies, digital tokens, and mostly unregulated cryptocurrency exchanges.
“We are witnessing a time of significant innovation in the securities markets with the use and application of distributed ledger technology,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “But to protect investors, this innovation necessitates the SEC’s thoughtful oversight of digital markets and enforcement of existing laws.”
Penalties and increased investigations
Zachary Coburn did not admit to charges but consented to the SEC order and has already paid $300,000 in fines plus $13,000 in prejudgment interest and a $75,000 penalty. In view of Coburn’s cooperation, the SEC agreed not to impose a greater penalty.
The investigation into EtherDelta continues by the SEC’s Cyber Unit and New York Regional Office.
Although unclear, Coburn is understood to be the former owner of EtherDelta, the cryptocurrency exchange is now believed to be operated by unknown Chinese owners.
SEC enforcement growing
The SEC has already undertaken a number of previous enforcement actions against individuals and companies regarding digital assets and Initial Coin Offerings (ICOs).
In the SEC Enforcement Division’s Annual Report, it highlights successful prosecutions, millions of dollars of penalties and fines, recovered assets, and charges against numerous offenders, including those in the cryptocurrency industry.
Among the overall enforcement highlights:
- brought 821 actions (490 of which were “stand-alone” actions) and obtained judgments and orders totaling more than $3.9 billion in disgorgement and penalties
- $794 million in assets, recovered for investors
- suspended trading in the securities of 280 companies, and obtained nearly 550 bars and suspensions
- charges against CEOs and CFOs, as well as accountants, auditors, and other gatekeepers in more than 70% of standalone cases
- first charges against a firm for violations of the Identity Theft Red Flags Rule, as well as other false regulatory filings and price manipulation
- enforcement actions for conduct ranging from registration violations to unregistered broker-dealer activity to instances in which the purported use of blockchain-related technology is merely a veneer for outright fraud
- shifted resources into market segments presenting emerging risks, including cyber threats and ICOs.
Industry watchers expect the pace of investigations and enforcement to increase while the SEC works on a much-needed regulatory framework for the cryptocurrency marketplace.
Visuals courtesy iStock, SEC, BlockcoinToday