SEC’s swift action against the founder of EtherDelta does not appear to have had an immediate impact on the crypto world. As the non-fiat community awakens to the regulatory rap, crypto prices remained flat. With the sole exception of a few raised voices from Korean Bar Association on Thursday for the legalization of crypto activities and encourage mass adoption, there has not been much activism from the industry or user community in protest against the fine.
However, SEC’s enforcement moves do have a handful of lessons for the Decentralized exchange (DEX) community in particular.
EtherDelta, the crypto token exchange has reached a settlement with the United States trade regulatory body Securities and Exchange Commission (SEC), following charges of operating the exchange without necessary approvals. Zachary Coburn, the founder of the unregistered exchange, did not challenge SEC’s scrutiny and instead chose to pay penalties to the tune of $388,000, disgorgement as well as interests as part of the settlement.
Andrew Hinkes, New York University School of Law professor in his expert commentary of the deal, opines that EtherDelta operated as an exchange without the necessary legal endorsements from the council and the securities laws and implications and thus action and enforcement from SEC were but a question of time.
Thus the agreement arrived between EtherDelta and the SEC sets a precedent for new things to happen with respect to Decentralized Exchanges (DEXs).
The surprising part of the deal is that Coburn no longer works with EtherDelta, having quit the organization in 2017. However, since SEC was penalizing the organization and its executive members for the period of July 12, 2016, and December 17, 2017, Coburn is party to the settlement.
By penalizing the exchange, SEC has established the precedent that decentralized networks cannot be irresponsible or behave differently from centralizes server networks. Secondly, even if the business has ceased to operate or the owners have changed, SEC will enforce securities laws.
The penalty imposed is just a matter of routine and did not have any other penalties in terms of his participation in the markets. Experts believe by cooperating with the regulatory body, Coburn was able to win himself his favor, else it could well have led to his suspension or higher fines to be participating in the capital markets.
The third lesson is that the SEC wants the executives behind the actions of an organization are to set up the guidelines for such management leaders to work within the regulatory dimensions and not demand exceptions.
The year 2017 saw a proliferation of ICOs and tokens, especially in the US capital markets. Additionally, a plethora of Decentralized exchanges also began to set up a shot using, most commonly, assets which ran on the Ethereum network. These exchanges engaged in swapping of assets and thereby did not see the need for operating under a licensing system. Besides, they believed that being decentralized agencies they ruled themselves out of the centralized server-system framework regulated by SEC.
Thus, another lesson learned here is that the Ethereum platform – ERC20, when used cannot be considered as exempt by the exchanges from SEC obligations and compliance. Smart contract operations are also violating Exchange Act, states cyber law expert Hinkes. However, if Coburn and his group were alert and had kept out “certain tokens” their operations on ERC20 would not have been an issue states Hinkes.
Hinkes hints that the settlement between the likes of Coburn by the SEC now throws open the question of operations of organizations like EtherDelta. The question of unregistered securities sales and purchase is now open-ended in the USA, while overseas regulators are welcoming ICO and token use. The legal labyrinth remains the biggest aftermath post the legal settlement with Coburn.