According to the press release published on November 8th, the U.S. Securities and Exchange Commission (SEC) has charged the founder of EtherDelta cryptocurrency exchange, Zachary Coburn, for operating an illegal securities exchange.
EtherDelta is one of the leading decentralized cryptocurrency exchange per daily volume and active users.
18 months of illegal practice
The SEC states that Coburn was, by not filing for the approval or asking for the exception from the ruling, violated a securities and exchange law in an 18-months long period of operation.
Co-Director of the SEC’s Enforcement Division Steven Peikin stated that securities market is going through a significant innovation period, as the distributed ledger technology is being implemented in the market’s products.
However positive that may be, he also stated that in order to protect investors from fraudulent conduct, the SEC has to practice a substantial amount of scrutiny and diligently enforce existing laws.
And according to those laws, some of the ERC-20 tokens traded on EtherDelta are described as securities, and as such, can be traded only on regulated exchange platforms.
Stephanie Avakian, Co-Director of the SEC’s Enforcement Division explained that Coburn’s exchange had all the functions and back end of an online national securities exchange, and was, therefore, obliged to be confirmed by the Commission.
SEC reported that EtherDelta processed around than 3.6 million orders after the Commission issued a 2017 DAO Report, by which DAO (Decentralized Autonomous Organization) tokens are considered to be securities. Since EtherDelta was offering these, the owner of the platform is being held responsible for the violation of the law.
Coburn cooperated but was still fined
Coburn has allegedly agreed to pay $300,000 as a repayment of ill-gotten gains, with the addition of $13,000 interest. The penalty of $75,000 was also issued for the founder of EtherDelta.
Coburn hasn’t denied nor confirmed these charges yet, but it was reported that he provided a full cooperation, which was taken into account when the fine was issued.
EtherDelta isn’t the first nor the last to be hit by SEC
Earlier this year, the SEC suspended all activity of the Nevada-based company American Retail Group, Inc. The company was given a cease and desist order by the Commission under the charges that they falsely claimed to be conducting a token offering officially registered and in legal accordance with the SEC.
Earlier this month, the Commission also reported that their thorough research of the market found dozens of startups conducting Initial Coin Offerings (ICOs) which are not in accordance with the legal framework, and can thus be considered as fraudulent.
The SEC claims that these fundraising campaigns have already raised over $68 million from a wide range of investors.
It is yet unknown what measures is SEC going to take towards these startups, but it is highly unlikely that the usually strict Commission is going to let it slide.
The importance of clear regulations
The importance of regulations in the blockchain and cryptocurrency business is frequently emphasized as the cornerstone of any healthy market.
However, in the US, crypto-related business is being conducted in accordance with the old set of securities regulation, which may not be fit for new technologies.
EtherDelta’s case is, therefore, an interesting example as the SEC ruled Ether (ETH) not to be a security, and as such, doesn’t fall under the securities act.
Since EtherDelta was a trading platform for trading ERC-20 tokens exclusively, which are issued on the Ethereum network, it remains unknown which parameters the SEC has taken into account to deduce if an ERC-20 token is a security or not.
Just last week, XBT.net reported that decentralized exchange IDEX had banned certain IP’s and will require its users to verify their identity.