SEC charges Zachary Coburn with running unregistered token exchange EtherDelta

US Securities and Exchange Commission Office photo D Ramey Logan.

The Securities and Exchange Commission (SEC) announced in a press release it sent to CoinReport that it had settled charges against Zachary Coburn, the founder of digital token trading platform EtherDelta, for operating the exchange without registration.

It is the first time that the SEC has taken action following findings that this type of platform ran as an unregistered national securities exchange.

In the SEC’s order, EtherDelta is termed “an online platform for secondary market trading of ERC20 tokens,” which are a kind of blockchain-based tokens that are generally issued in ICOs (Initial Coin Offerings).

According to the order, Coburn made the platform function as an unregistered national securities exchange.

EtherDelta offered a marketplace for uniting sellers and purchasers for digital asset securities via the collective utilization of an order book, a website that showed orders, and a “smart contract” run on the Ethereum blockchain.

The exchange’s smart contract was programmed to authenticate the orders, confirm the orders’ terms and conditions, process paired orders, and instruct the distributed ledger to be updated to mirror a trade.

Over a period of 18 months, the platform’s users carried out over 3.6 million orders for ERC20 tokens, including tokens that are securities under the federal securities laws. Nearly every order placed on the exchange was traded following the SEC issuing its 2017 DAO Report, which resolved that specific digital assets, like DAO tokens, were securities and that exchanges delivering trading of these digital asset securities would be subject to the commission’s requirements that platforms register or run pursuant to an exemption.

EtherDelta provided trading of several digital asset securities and didn’t register as an exchange or run pursuant to an exemption.  

SEC Enforcement Division Co-Director Stephanie Avakian

SEC Enforcement Division Co-Director Stephanie Avakian said in the news release we received, “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.”

SEC Enforcement Division Co-Director Steven Peikin

Division Co-Director Steven Peikin commented, “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.”

Previously, the commission has taken action against unregistered ICOs, including some of the tokens traded on EtherDelta, and unregistered broker-dealers.

Coburn, without denying or admitting the findings, agreed to the order and to pay $300k in disgorgement plus $13k in prejudgment interest and a $75k penalty. The SEC’s order acknowledges Coburn’s cooperation, which the commission took into account in determining not to impose a bigger penalty.

The investigation by the SEC is continuing. Jorge G. Tenreiro and Alison R. Levine of the New York Regional Office and Daphna A. Waxman of the division’s Cyber Unit are conducting the investigation, with the case being supervised by Cyber Unit Chief Robert A. Cohen.

Image credits:

SEC building photo – D Ramey Logan  (CC BY 4.0)

Stephanie Avakian’s photo – Via her bio on SEC’s website

Steven Peikin’s photo – Via his bio on SEC’s website