• wblogo
  • wblogo
  • wblogo

SEC charges EtherDelta founder with operating unregistered exchange

Chris Hamblin, Editor, London, 19 November 2018

articleimage

The Securities and Exchange Commission has announced that it has settled charges against Zachary Coburn, the founder of EtherDelta, a digital token-trading platform. This is the first time the SEC has taken action against such a platform for operating as an unregistered national securities exchange.

According to the SEC's order, EtherDelta is an online platform for secondary market trading of ERC20 tokens, a type of blockchain-based token commonly issued in initial coin offerings (ICOs). The order found that Coburn caused EtherDelta to operate as an unregistered national securities exchange, although he neither admits nor denies this.

EtherDelta provided a marketplace on which it brought the buyers and sellers of digital asset securities together 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.

Over an 18-month period, EtherDelta's users executed more than 3.6 million orders for ERC20 tokens, including tokens that are securities under US federal securities laws. Almost all of the orders placed through EtherDelta's platform were traded after the SEC issued its 2017 DAO (decentralised autonomous organisation) 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 rule that obliges exchanges to register or operate in accordance with an exemption. EtherDelta failed to do this. A DAO is a virtual organisation embodied in computer code and executed on a distributed ledger or blockchain.

The SEC says that 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. The regulator wants to protect investors by wedding innovation of this kind to existing laws."

The SEC has already taken action against unregistered broker-dealers and unregistered ICOs, including some of the tokens traded on EtherDelta. Coburn consented to the order and agreed to 'disgorge' US$300,000 of his ill-gotten gains plus $13,000 in prejudgment interest and a $75,000 penalty. The SEC's investigation continues.

Latest Comment and Analysis

Latest News

Award Winners

Most Read

More Stories

Latest Poll