What Can Be Learned From An Exchange Shut Down?
EtherDelta founder Zachary Coburn is known for its digital token trading platform and one more thing – the SEC’s charges against the platform due to its operation as an “unregistered national” security. This week, the SEC settled charges against him.
The team at Abacus Journal takes a deep look into what lead up to the SEC charges as well as what it means for the rest of the industry. Here is a brief rundown of what they concluded
Issues arose months ago, in which the platform’s users executed around 3.6 million orders of ERC20 tokens. The platform’s orders were issued, even after the SEC the 2017DAO Report that found that specific digital assets are securities. Assets that traded the specified assets would then be under the purview of the SEC and its requirements, unless the asset was exempt. Coburn neither admitted nor denied whether he violated the order, but the settlement agreement requires that he pay $300,000 in disgorgement fees and prejudgment interest in the amount of $13,000. The SEC also levied a $75,000 penalty against him as well. The decision against a higher penalty was due to Coburn’s cooperation.
The SEC also recently stated that it will “focus on platforms that offer trading of digital assets and their compliance with federal securities laws.” The SEC’s decisions are driven by the desire to protect investors. The SEC’s statement also solidifies its position that those that participating in “trading of digital assets that are securities and operates as an ‘exchange,’ as defined by the federal securities law, must register as a national securities exchange or be exempt from registration.”
Though the SEC had taken such as position, very few exchanges actually registered. The lack of self-reporting was highlighted by SEC Director Brett Redfeam, who expressed that the SEC was “underwhelmed by the enthusiasm for coming within the regulatory structure.” He also discussed that some exchanges are trading ICOs and that the SEC is looking forward to seeing an increase in registration.
On the other hand, it may be the case that several exchanges failed to register and self-report due to concern that the commission would act with enforcement action. Another reason could be the absence of concrete guidelines concerning their obligations.
These issues do not mean that there are no exchanges willing to register. For example, Jesse Powell of Krakren recently stated that the platform would “probably get registered” with the commission, but first it would like to see “more clarity from the regulator about which digital coins are securities and how those tokens can trade legally.” Another like-example is Prometheum Inc., which registered with the SEC. Moreover, Circle Internet Financial Ltd.’s CEO Jeremy Allaire stated that his firm had discussed registering and that the company had an interested in gaining status as a registered exchange.
Another example is Coinbase, which acquired Keystone Corp. The move is strategic of course, as it will permit Coinbase to participate in broker-dealer relationships, digital asset exchanges, and activities for investment advisors – after it receives federal approval of course.
Back to the Coburn case. It is possible that the SEC is open to working with individuals who cooperate and it may end up better for participants as well. The SEC did not ban Coburn from participating in market activities in the future either.
At the end of the day, exchanges that do not register may find themselves under fire or worse, in the same situation as Coburn.