SEC: EtherDelta was running an unregistered securities exchange

Irving Hamilton
November 9, 2018

"This will likely be the first of many enforcement actions and think the following sentence is interesting", Dina Ellis Rochkind of the law firm Paul Hastings LLP told Reuters.

In what could prove to be a groundbreaking case, the US Securities and Exchange Commission has charged the founder of cryptocurrency trading platform EtherDelta, Zachary Coburn, with running an "unregistered national securities exchange".

In the SEC's book EtherDelta meets the "criteria of an exchange", as defined by Section 3 (a)(1) of the Exchange Act. Coburn and other software developers who operated the platform were the primary beneficiaries of that fee.

The agency stated in its press release that nearly all of EtherDelta's orders were placed after the SEC issued its 2017 DAO Report. According to the federal agency, EthereDelta failed to list itself in any of these two categories, while the exchange offered to trade for tokens that are considered as securities by the SEC. It went further to argue that a large majority of the orders placed on the platforms "were traded after the Commission issued its 2017 DAO Report", which stipulated that certain assets like the DAO tokens were securities, placing any platform that offered trading of such "digital asset securities" under the "SEC's requirement that exchanges register or operate pursuant to an exemption".

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As a DEX, EtherDelta allows users to trade Ethereum based tokens anonymously and without the funds being stored by the exchange. For the record, the investigation is still ongoing, and Coburn has neither admitted or denied the findings of SEC's report.

"We are witnessing a time of significant innovation in the securities markets with the use and application of distributed ledger technology, but to protect investors, this innovation necessitates the SEC's thoughtful oversight of digital markets and enforcement of existing laws."
Despite EtherDelta being a strictly decentralized ERC20 exchange, the SEC seems to still enforce regulation over such platforms. The SEC added that the decentralized exchange was operating as an unregistered exchange due to Mr. Coburn's actions.

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