SEC Settles With Alleged Unregistered Security Token Exchange
The Securities and Exchange Commission today announced settled charges against Zachary Coburn, the founder of EtherDelta, a digital “token” trading platform. This is the SEC’s first enforcement action based on findings that such a platform operated 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.
EtherDelta provided a marketplace for bringing together buyers and sellers for digital asset securities 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 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 trading of these digital asset securities would be subject to the SEC’s requirement that exchanges register or operate pursuant to an exemption. EtherDelta offered trading of various digital asset securities and failed to register as an exchange or operate pursuant to an exemption.
“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.
“We are witnessing a time of significant innovation in the securities markets with the use and application of distributed ledger technology,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “But to protect investors, this innovation necessitates the SEC’s thoughtful oversight of digital markets and enforcement of existing laws.”
The SEC has previously brought enforcement actions relating to unregistered broker-dealers and unregistered ICOs, including some of the tokens traded on EtherDelta.
Without admitting or denying the findings, Coburn consented to the order and agreed to pay $300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty. The Commission’s order recognizes Coburn’s cooperation, which the Commission considered in determining not to impose a greater penalty.
The SEC’s investigation, which is continuing, is being conducted by Daphna A. Waxman of the Division’s Cyber Unit and Alison R. Levine and Jorge G. Tenreiro of the New York Regional Office. The case is being supervised by Robert A. Cohen, Cyber Unit Chief.