On November 8, 2018, the U.S. Securities and Exchange Commission (“SEC”) announced that it settled charges against Zachary Coburn, the founder of blockchain token trading platform EtherDelta, over operating an unregistered securities exchange1. The SEC’s cease-and-desist order to Coburn describes EtherDelta’s website as a user-friendly interface resembling online securities trading platforms. The order states that over 3.6 million trades in digital assets were placed on EtherDelta between its launch on July 12, 2017 and December 15, 2017, when Coburn stopped collecting transaction fees. Further, 92% of those trades occurred after the SEC released the DAO Report on July 25, 2017. As noted in the order, the SEC advised in the DAO Report that platforms trading in digital assets constituting securities may be “exchanges” under federal securities laws requiring either registration with the SEC or exemption from registration. The SEC determined that during the relevant period, EtherDelta met the criteria of an “exchange” under federal securities laws, but was not registered with the SEC or operating pursuant to a registration exemption. In turn, Coburn’s actions in founding EtherDelta, writing and deploying the site’s smart contract, and overseeing the site’s operations contributed to violations of the federal securities laws.
Without admitting or denying the allegations, Coburn agreed to pay a $75,000 fine and $313,000 in disgorgement and interest. Notably, the order makes no allegation of fraud or misrepresentation. It also does not address the amount or proportion of trades that occurred within the U.S. versus abroad; instead, the order simply states that “the EtherDelta platform was available to anyone, including U.S. persons.”
The order, along with recent actions against broker-dealers and a hedge fund in the cryptocurrency markets, reaffirms the SEC’s warning in the DAO Report: the federal securities laws may extend beyond token issuers to market “participants” offering digital assets when U.S. purchasers may be impacted.
1 Zachary Coburn, Exchange Act Release No. 84553 (Nov. 8, 2018), https://www.sec.gov/litigation/admin/2018/34-84553.pdf.