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The US Securities and Exchange Commission (SEC) has charged Zachary Coburn, a co-founder of decentralized crypto exchange EtherDelta, for operating an unregistered national securities exchange.

In its official statement, the SEC also emphasized that EtherDelta illicitly distributed unregistered securities by allowing users to trade tokens considered as securities under US laws.

“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.”

Unregistered Securities: Precedent for the Market

EtherDelta was considered a decentralized exchange ever since its launch in 2017, mainly because orders were processed on the Ethereum mainnet.

But, the platform was run by a single entity led by Coburn, and if there exists a single point of failure, then the exchange cannot be considered a decentralized platform. Rather, a more accurate description of EtherDelta is a non-custodial platform on which users have complete control over their private keys and funds.

If the US SEC continues to go after non-custodial trading platforms that are not fully decentralized, such as IDEX, then virtually every single platform that calls itself a “decentralized” exchange could be taken down for the distribution of unregistered securities.

As such, on November 2, as CCN reported, IDEX began to integrate a Know Your Customer (KYC) system and block IP addresses from several locations.

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The EtherDelta charges raise questions about the viability of decentralized exchanges, most of which currently run on Ethereum and let traders swap ERC-20 tokens.

There are a few completely decentralized and peer-to-peer exchanges like Bisq, which can be run similarly to a Bitcoin or an Ethereum node in that users download the Bisq software from GitHub and simply run it to use the exchange. Hence, because it is run by an open-source developer community, Bisq cannot be taken down by the authorities.

But, the vast majority of “decentralized” exchanges have development teams and entities in place that govern them, leaving the exchanges vulnerable to potential SEC’s investigations.

In regards to EtherDelta, the SEC stated that ERC20 tokens, many of which are considered securities, were being actively traded on the platform for nearly two years, which is applicable to many other decentralized exchanges in the space.

“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.”

In agreement with the SEC’s findings, EtherDelta co-founder Zachary Coburn consented to pay $300,000 in disgorgement, $13,000 in prejudgment interest, and a $75,000 penalty without any additional penalty for his cooperation with the SEC.

Setting an Example

The SEC’s cooperation with Coburn to takedown EtherDelta with a minimum penalty imposed on its co-founder can be acknowledged as the effort of the commission to set an example across the board and in the decentralized exchange market of crypto.

Throughout the upcoming months, the SEC is expected to target more platforms, especially decentralized exchanges run by the citizens of the US that have no KYC, transaction monitoring, or license in place.

Images from Shutterstock

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