SEC fines the owner of decentralized cryptocurrency exchange EtherDelta $388K, prompting fears of further enforcement action against crypto trading platformsFindThe Securities and Exchange Commission's (SEC) settlement with the founder of EtherDelta is likely the first of many enforcement actions to come against crypto token exchanges.
Until recently, the SEC's scrutiny of the cryptocurrency industry largely focused on projects and teams that raised money through initial coin offerings (ICOs) in possible violation of securities laws. But a person familiar with the SEC's thinking told CoinDesk Thursday that crypto trading platforms have become a significant priority for the agency's enforcement division.
As such, the news that the SEC had charged EtherDelta founder Zachary Coburn with operating an unregistered securities exchange can be seen as a shot across the bow of token-trading platforms.
"At this point, if you're doing an exchange of crypto assets, dealing with U.S. persons, you probably need to get either a no-action letter or get clarity from counsel about whether you are implicating securities laws," said Andrew Hinkes, an adjunct professor at the New York University School of Law.
And while the EtherDelta action was the SEC's first against a crypto exchange, Hinkes told CoinDesk:
"I'm surprised it took this long."
Further, the case shows that even if so-called decentralized exchanges (DEXs) cannot be easily shut down, that does mean no one will be held liable for their activities. Without admitting or denying the charges, Coburn agreed to pay a total of $388,000 in penalties, disgorgement and interest under the settlement.
"This tells you that an exchange that used a distributed set of nodes instead of a centralized server isn't going to be treated any differently," Hinkes said. "Just because you make it and then it gets operated by a decentralized network of others doesn't mean that any prospective responsibility or liability is gone. It's just possibly relocated."
And notably, the action was taken against Coburn even though he left EtherDelta in late 2017. The trades of ethereum-based tokens on the platform cited by SEC took place between July 12, 2016 and December 17, 2017, around the time of his departure.
"It doesn't matter whether you sell the business or operated it a year ago or a few years ago," said Preston Byrne, a partner at the law firm Byrne & Storm, P.C. "American securities laws are going to be enforced."
On the other hand, it's also telling that Coburn's penalty was merely a low-six-figure fine. He wasn't banned from participating in capital markets, in part because he cooperated with the SEC, which wants other individuals running or planning to run similar platforms to reach out to the agency first.
"The entrepreneur, in this case, cooperated fully with the commission, which is often a good idea," Byrne said. "It shows the SEC is willing to work with people who are willing to work with them."
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