SEC Files Charges Against EtherDelta Founder

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The U.S. Securities and Exchange Commission (SEC) has filed charges alleging that EtherDelta founder Zachary Coburn operated an unregistered securities exchange until 2017, when he sold the company. Coburn has already settled the charges and paid nearly $400,000 in fines. This action could have implications for decentralized exchanges and their operators.

SEC Position on Ethereum Tokens a Factor

The SEC has taken the position that most, if not all, Ethereum tokens such as those traded on EtherDelta are digital asset securities — tokens that only differ from traditional securities because they are designed to be entirely digitalized. According to the SEC’s definitions, EtherDelta had all the earmarks of a securities exchange, including an order book and a website on which users could exchange security tokens.

“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 said in paperwork related to the charges against Coburn.

The paperwork went on to add that EtherDelta had traded securities for an 18-month period after an SEC report on Decentralized Autonomous Organizations (DAOs) that was released in 2017. EtherDelta failed to file the required paperwork or apply for an exemption during that time.

SEC Likely to Target More Token Exchanges

After having its way with EtherDelta’s founder, the SEC will likely be emboldened to target similar token exchanges. It has previously only focused on ICOs that committed violations ranging from failing to file the paperwork to committing outright fraud.

However, some observers were probably not surprised, considering that ShapeShift’s and IDEX’s decisions to implement KYC/AML procedures led to speculation that regulators were starting to put more pressure on exchanges that operate purely in cryptocurrencies and digital tokens without having a fiat currency on-ramp or off-ramp.

Several cryptocurrency industry insiders mentioned that the effects of the SEC’s decision to pay more attention to exchanges could even force their operators to go underground. Expanse co-founder Christopher Franko said in a Tweet,

“The SEC / EtherDelta decision today really underlines how important fault tolerance and anonymity is and why it will make a resurgence in 2019.”

Some experts do say that the SEC is not very interested in driving the digital asset marketplace completely underground. Attorneys like Preston Byrne, a partner at the law firm Byrne & Storm, P.C., say that of course, the SEC is going to enforce its own regulations, but it doesn’t necessarily need to be seen as the enemy.

“[The EtherDelta case] shows the SEC is willing to work with people who are willing to work with them,” said Byrne.

However, this does not change the attitudes of cryptocurrency insiders who believe that regulators should just mind their own business. Could exchanges like EtherDelta survive if they are forced to make a choice between working with regulators? Many users of these exchanges may interpret that as allowing regulators to call the shots and bail out to another exchange that hasn’t effectively surrendered yet. Many former ShapeShift users have turned to alternatives like Flyp.me and EasyRabbit because they did not want the hassle and loss of privacy that comes with KYC procedures, for instance. Exchanges that work with regulators may survive, but they will likely have to live with a reduced market share due to users who turned to cryptocurrency in the first place because they like their privacy.

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