SEC Hits EtherDelta Founder for Operating Unregistered Exchange

SEC Hits EtherDelta Founder for Operating Unregistered Exchange

The U.S. Securities and Exchange Commission (SEC), the nation’s top securities regulator, has announced a settling of charges with Zachary Coburn, founder and former operator of decentralized cryptocurrency exchange EtherDelta. The Commission had charged Coburn with running an unregistered securities exchange.

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DEX Me Once, Shame on You …

On November 8th, 2018, the SEC announced charges against, and settlement with, EtherDelta founder Zachary Coburn. The judgment mandated Coburn, the exchange’s former lone operator, pay almost $400,000 USD in restitutive funds for operating an “unregistered national securities exchange.”

For an 18-month stretch, EtherDelta, a decentralized exchange or DEX, facilitated millions of trades of tokens “that are securities under the federal securities laws,” the SEC noted.

DEXes are cryptocurrency exchanges where users maintain sole control of their funds — a contrast to centralized platforms where employees have access to users’ wallets.

The SEC didn’t specify which tokens were the offending securities but explained how the Commission’s 2017 DAO Report had already established many tokens as securities — thus exchanges with U.S. users dealing with such tokens must comply with American securities laws.

That’s what EtherDelta under Coburn’s stewardship didn’t do, said the SEC:

“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.”

EtherDelta Founder to Pay the Piper — More A’Comin’

Coburn, who as part of the judgment didn’t have to admit guilt, has reportedly been cooperative with the SEC, a factor the Commission said led to him only owing the following punitive payments:

  • A $75,000 penalty 
  • A $13,000 prejudgment interest sum
  • A $300,000 disgorgement, i.e. illegal profits forfeiture

This was an inaugural enforcement operation for the SEC, insofar as the Commission hasn’t previously targeted decentralized exchanges, or at least their operators, for securities violations.

For EtherDelta’s part, they have had new overseas owners for months and the platform is fully operational at press time.

Under new management for some time, EtherDelta sees its trading unaffected by the news. Image via EtherDelta.

But Coburn’s settlement is a shot across the bow for founders of other DEXes who have been servicing U.S. customers under the assumption that their decentralized operations would put them beyond the reach of American regulators.

Not so, the SEC’s officially gone on the record as saying. It’s likely just the tip of the iceberg enforcement-wise for the Commission in the months and years ahead. As an added wrinkle, the regulators have announced they are coming up with new “plain English” guidelines for token offerings.

What’s your take? What other operations do you think might be hearing from the SEC soon? Let us know in the comments section below. 

Images via EtherDelta, Pixabay

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