SEC Penalizes Ethereum-Based Digital Exchange EtherDelta For Violation Of Securities Law

The Securities and Exchange Commission (SEC) has scrutinized and investigated initial coin offerings in the past but, in a first, the watchdog has taken enforcement action against a cryptocurrency exchange for possible violation of securities laws.

On Thursday, the commission said charges against Zachary Coburn," the founder of EtherDelta, an ethereum-based digital token trading platform, had been settled.

"This is the SEC's first enforcement action based on findings that such a platform operated as an unregistered national securities exchange. The order found that Coburn caused EtherDelta to operate as an unregistered national securities exchange," the commisison said in a statement.

EtherDelta is an exchange platform for secondary market trading of ERC20 tokens — blockchain-based token commonly issued in initial coin offerings. According to SEC, the platform acted as a marketplace for both buyers and sellers for "digital asset securities" through the combined use of an order book — a website that displayed orders -- and a smart contract that runs on the ethereum blockchain.

The users of the exchange, for over an 18-month period and using the features of the smart contract, executed more than 3.6 million orders for ERC20 tokens that included tokens that are securities under the federal securities laws.

"Almost all of the orders placed through EtherDelta's platform were traded after the commission issued its 2017 DAO Report, which concluded that certain digital assets, such as DAO tokens, were securities and that platforms that offered to trade of these digital asset securities would be subject to the SEC's requirement that exchanges register or operate pursuant to an exemption," the statement further noted. EtherDelta offered to trade digital asset securities but had failed to register as an exchange.

"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," said Stephanie Avakian, co-director of the SEC's enforcement division.

Coburn neither admitted the allegations nor denied them, but consented to the order and accepted to pay "$300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty."

"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," said Steven Peikin, another co-director of the division.

The SEC had previously taken enforcement actions relating to unregistered broker-dealers and unregistered ICOs, including some of the tokens traded on EtherDelta. This latest announcement from SEC caught the attention of many crypto-community members, some of whom said that this is just a start and one can expect more such enforcement actions from the commission.

Some, however, said the "enforcement" was not that rigid but looked "positive."