SEC vs Decentralized Exchanges: DEX’s Are Under Attack from the Securities and Exchange Commission


It appears there’s no end in sight to the spate of heightened regulatory measures and sanctions being meted out on major cryptocurrency exchange platforms.

While many are beginning to project an investment future that will be dominated by blockchain technology, digital business, asset and market, it is becoming increasingly glaring that some scapegoats and fall guys will have to suffer in the long walk to the robust and ‘free’ crypto future.

One of such sacrifices is the current trend of regulatory sanctions targeted at decentralized exchanges, especially on the discouragement of peer to peer trading. The US Securities and Exchange Commission (SEC) is responsible for regulating the securities and exchange industry, while sanctioning defaulter exchanges.

For some time now, the regulatory body has been involved in a number of sanctions, and investigations into the activities of many of the cryptocurrencies, including the biggest one, Bitcoin. Recently, an investigation was started against Riot Blockchain over what the agency called a pump and dump scheme in the company’s registration statements.

The latest attack is aimed at one of the more popular cryptocurrencies, EtherDelta. EtherDelta is a smart contract-powered decentralized exchange for ether and Ethereum-based tokens. The sanction communicated to the crypto industry that peer to peer trading may not get a nod in the U.S. exchange market.

One thing about EtherDelta is that it runs on code, and that makes it difficult for the SEC to institute any charge against the exchange.

EtherDelta was launched in 2016 by Chicago-based Zachary Coburn, entrepreneur and crypto investor, but there has been close watch on the exchange by the US securities watchdog.

The charge that the SEC levelled against EtherDelta is its founder’s alleged failure to register his company with the Commission as a “national securities exchange.”

Despite his failure to comply with the Commission’s order and guiding rules, EtherDelta is said to be used to lend support to buy and sell orders for ERC20-tokens.

Although, it remains unclear what the regulations on what constitute a security token, the SEC has scored a victory with its sanctioning of EtherDelta. But then, suggestions are the table for the Commission to define both the parameters and framework for the operation of decentralized exchanges (DEXS) in jurisdiction like the U.S.

But as a true decentralized system, EtherDelta is enjoying utilizing ETH-based tokens in facilitating its trading. Meanwhile, this sounds like winning a temporary battle with the SEC but losing the whole war as it investors can no longer trade peer-to-peer.

In the interim, reports claim that Coburn is willing to cooperate with the Wall Street exchange regulator, who has placed its bulls eye on the exchange platform for what it is called ‘cease and desist’ order.

It is in fact claimed that Coburn has agreed to have an out of court settlement with the SEC, agreeing to pay fines amounting to a whopping $400,000.

The SEC regulatory framework is apparently serving as an order to remind all exchange platforms and digital asset holders to desist from peer to peer exchange.

So, What Are The Limits Of Decentralized Exchanges In Certain Jurisdictions?

It is not clear whether the regulations of peer-to-peer trading will be imposed on DEX globally or it will be jurisdiction specific.

Whatever be the case, there is an insight from blockchain tech founder who said that the question of the limit of decentralized exchange platforms is not as easy as it is perceived, “especially in certain jurisdictions.”

There seems to be a general agreement on this among DEX operators. For instance, Alex Wearn, who presides over IDEX, sees the question on the Know Your Customer feature to favor a framework that will be jurisdiction specific.

“It’s hard to predict exactly which way it will go. I think it’s going to be jurisdiction specific and it’s going to be at specific times,” Wearn said… “I think the U.S. is…certainly kind of leading the charge from a regulatory standpoint and I think a lot of other countries are going to follow suit,”

he added.

Crypto Exchange To Shift To Centralized Platform?

Going by the trends of the relationship between the SEC and decentralized trading platforms, it does not seem that the crypto industry will have to rely on decentralized platforms for success. After all, relationships between the regulators and some centralized trading platforms such as Coinbase, have been relatively smooth.

In fact, Coinbase was ranked as the most popular and reliable US based crypto exchange platform; yet, centralized exchange platforms see the gap, both technical and operational, in their progress and growth timeline with their decentralized counterparts.

Even Coinbase is said to be planning revising its listing models in order to be able to increase the frequency of its coins totaling. Hence, its launch of Paradex becomes something that is geared towards imitating DEXs.

But due to the sophistication of the functionality of easier interfaces and navigation of the centralized systems, Crypto exchange will have to either remodel the operations of its decentralized systems or fully comply with the SEC regulations to avoid huge financial losses and bad reputation.

Again, even Binance is said to be thinking of working with a decentralized model of its centralized trading platform, following the ATRON improved version of DEX last month. And it is believed, at least following the words of Binance’s CEO Changpeng Zhao, that the platform will be launched by the first quarter of 2019.

However, compliance with the SEC rules is non-negotiable. Considering the case, for instance, of Everbloom, that, in spite of being a decentralized platform, still largely complies and has a smooth relationship with the SEC in other climes.

Everbloom is said to be in the loop of completing its SEC registration while also pursuing getting a lisence from FINRA. This is a step in the right direction and US-based DEXs can also emulate this in order to avoid being subject under the hammer of the SEC or fidget of falling back to a centralized system for failure to comply with rules.

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