SEC Charges Firm Founder with Operating Unregistered Exchange

EtherDelta founder Zachary Coburn to pay nearly $400,000 in disgorgement and fines.

The founder of a digital “token” trading platform has agreed to pay nearly $400,000 to the SEC to settle charges that he was operating an unregistered national securities exchange. It is the regulator’s first enforcement action based on findings that such a platform operated as an unregistered national securities exchange.

The SEC issued a cease-and-desist order against Zachary Coburn, the founder of EtherDelta, an online platform for secondary market trading of ERC20 tokens, a type of blockchain-based token often issued in initial coin offerings.

According to the order, EtherDelta provided a marketplace for buyers and sellers of digital asset securities through an order book, and a website that displayed orders, and a “smart contract” run on the Ethereum blockchain.

“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,” Stephanie Avakian, co-director of the SEC’s Enforcement Division, said in a release.

The SEC said that 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 SEC issued its decentralized autonomous organization report (DAO) in 2017, which said that certain digital assets, such as DAO tokens, were securities and that the 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.

The order found that despite offering trading of various digital asset securities, EtherDelta failed to register as an exchange or operate pursuant to an exemption.

“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.”

Without admitting or denying the findings, Coburn agreed to pay $300,000 in disgorgement, plus $13,000 in prejudgment interest and a $75,000 penalty. The SEC said Coburn’s fine would have been larger if not for his cooperation with the regulator.

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