0/ The SEC took its first shot at an unregistered crypto exchange today, charging the founder of EtherDelta with a violation of the federal securities laws.
So much to unpack. I know I'm late to the party, but here are my thoughts on what happened & what it means.
Thread. 👇
So much to unpack. I know I'm late to the party, but here are my thoughts on what happened & what it means.
Thread. 👇
1/ EtherDelta was a decentralized exchange that allowed people to trade any ERC20 token launched on Ethereum.
For many ICOs, EtherDelta was the first source of liquidity available to investors before tokens were listed on a "real" (centralized) exchange.
coindesk.com/sec-charges-et…
For many ICOs, EtherDelta was the first source of liquidity available to investors before tokens were listed on a "real" (centralized) exchange.
coindesk.com/sec-charges-et…
2/ The defendant in today's enforcement action is Zachary Coburn, who created & launched EtherDelta on July 12, 2016.
The SEC said he violated Exchange Act Section 5, which prohibits exchanges from trading securities unless they're registered or qualify for an exemption.
The SEC said he violated Exchange Act Section 5, which prohibits exchanges from trading securities unless they're registered or qualify for an exemption.
3/ Even though EtherDelta was just a smart contract on Ethereum, the SEC said it was legally an "exchange" because it "brought together purchasers and sellers of securities."
To settle the action, Coburn agreed to pay a $75,000 penalty and $313,000 in disgorgement plus interest.
To settle the action, Coburn agreed to pay a $75,000 penalty and $313,000 in disgorgement plus interest.
4/ If you want more details, check out the SEC's full order.
One amusing note: the second paragraph of the order says that EtherDelta had "a user-friendly interface." That's not quite how I remember it! I guess no SEC lawyers were trading there in 2017.
cloudup.com/c6bvjk-fGE3
One amusing note: the second paragraph of the order says that EtherDelta had "a user-friendly interface." That's not quite how I remember it! I guess no SEC lawyers were trading there in 2017.
cloudup.com/c6bvjk-fGE3
5/ So, what does this all mean?
The big takeaway: this is likely the first of many SEC enforcement actions against crypto exchanges. Credit to three top crypto lawyers (@stephendpalley, @prestonjbyrne & @propelforward) for nailing this on CoinDesk today.
coindesk.com/expect-the-sec…
The big takeaway: this is likely the first of many SEC enforcement actions against crypto exchanges. Credit to three top crypto lawyers (@stephendpalley, @prestonjbyrne & @propelforward) for nailing this on CoinDesk today.
coindesk.com/expect-the-sec…
6/ If you've been paying attention, the announcement was no surprise.
The SEC has been warning about "potentially unlawful online platforms for trading digital assets" since March 7, 2018 (sec.gov/news/public-st…). This was in the works for a long time.
The SEC has been warning about "potentially unlawful online platforms for trading digital assets" since March 7, 2018 (sec.gov/news/public-st…). This was in the works for a long time.
7/ A few other key points for consideration.
Most enforcement actions are kept confidential until they're resolved to protect both the defendant (from bad press) & the government (from losses & inconsistencies). That's why this case was settled before it was announced.
Most enforcement actions are kept confidential until they're resolved to protect both the defendant (from bad press) & the government (from losses & inconsistencies). That's why this case was settled before it was announced.
8/ On that point, remember all those subpoenas the SEC sent out earlier this year?
Just because you haven't heard about them recently doesn't mean there aren't dozens of investigations going on behind the scenes. Sooner or later, the floodgates will open.
coindesk.com/sec-official-s…
Just because you haven't heard about them recently doesn't mean there aren't dozens of investigations going on behind the scenes. Sooner or later, the floodgates will open.
coindesk.com/sec-official-s…
9/ The SEC continues its usual enforcement pattern: start with easy wins to set up favorable precedent before moving on to tougher (wealthier) targets.
After all, it's easier to prosecute one guy who's out of the game than a centralized exchange with a healthy balance sheet.
After all, it's easier to prosecute one guy who's out of the game than a centralized exchange with a healthy balance sheet.
10/ The SEC also continues to leave everyone in the dark on what exactly they think qualifies as a regulated security.
The order says EtherDelta listed "tokens that included securities" but doesn't identify a single one that satisfies the Howey test. Not helpful, guys.
The order says EtherDelta listed "tokens that included securities" but doesn't identify a single one that satisfies the Howey test. Not helpful, guys.
11/ Is it fair to say at least one EtherDelta token was a security? Sure, but it would be great if the SEC would tell us *which one.*
This regulatory uncertainty leads to press releases like the following from 0x. The industry needs clarity from the SEC.
This regulatory uncertainty leads to press releases like the following from 0x. The industry needs clarity from the SEC.
12/ Hopefully that's what the SEC's new Strategic Hub for Innovation and Financial Technology ("FinHub") will provide.
The SEC claimed FinHub would serve as a resource for the crypto industry. Explaining what's legal & what's not would be a good start.
coindesk.com/the-sec-is-set…
The SEC claimed FinHub would serve as a resource for the crypto industry. Explaining what's legal & what's not would be a good start.
coindesk.com/the-sec-is-set…
13/ Turning back to the order, note that it references the 2017 DAO Report, which was the first time the SEC said a token was a security.
The order basically says, "after we issued that Report, it was clear these tokens were securities, so don't tell us you didn't know better."
The order basically says, "after we issued that Report, it was clear these tokens were securities, so don't tell us you didn't know better."
14/ I read this as the SEC laying the groundwork to prosecute ICOs directly for failure to register under the Securities Act, which they still haven't done so far (except for blatant ponzis & scams).
If you launched an ICO after the DAO Report, you might be in the line of fire.
If you launched an ICO after the DAO Report, you might be in the line of fire.
15/ But just because you violate the securities laws doesn't mean you get crushed. Coburn's only consequence was financial (he pays $388,000).
The same may be true for ICOs & centralized exchanges that settle with the SEC: pay a fine, file a registration, and get back to work.
The same may be true for ICOs & centralized exchanges that settle with the SEC: pay a fine, file a registration, and get back to work.
16/ The order also shows that decentralization protects *software,* not developers. Maybe the government can't shut down an illegal smart contract, but it can prosecute the people who launch & use it.
I wouldn't be surprised if developers increasingly go anonymous in response.
I wouldn't be surprised if developers increasingly go anonymous in response.
17/ Okay, so what happens next?
More of the same, definitely. But eventually the SEC will run out of easy targets and into tougher issues. For example, one question is whether the SEC can go after exchanges located outside US borders.
They'll likely try, but will they succeed?
More of the same, definitely. But eventually the SEC will run out of easy targets and into tougher issues. For example, one question is whether the SEC can go after exchanges located outside US borders.
They'll likely try, but will they succeed?
18/ Ultimately, actions like this are interesting but don't tell us much.
The SEC gets a quick win, but that's about all. We're still living in a world of regulatory uncertainty, and unless the SEC starts talking or Congress starts legislating, that's where we're going to stay.
The SEC gets a quick win, but that's about all. We're still living in a world of regulatory uncertainty, and unless the SEC starts talking or Congress starts legislating, that's where we're going to stay.
