It would appear more trouble may be brewing for the cryptocurrency industry. Although there is still no official industry regulation in the United States, dark clouds are gathering over EtherDelta. Zachary Coburn, the founder of the platform, is charged by the SEC for running an unregistered securities exchange.
ERC20 Tokens Are Always Risky
No one should be really surprised to learn the SEC doesn’t look favorable upon platforms trading ERC20 tokens. While the institution has deemed Ethereum to not be a security, after all, the same doesn’t automatically apply for tokens issued on top of this blockchain. In fact, the opposite may come true for some specific offerings.
Over the past few months, the SEC has actively cracked down on ICOs which would potentially violate securities laws. Unsurprisingly, most of those cases involve ERC20 tokens. Most of those tokens are effectively trading on EtherDelta, primarily because users can create their own trading pairs as they see fit without too much intervention from the site owner.
For Zachary Coburn, who effectively founded the platform, things are not cut-and-dry by any means. In the eyes of SEC officials, he has engaged in operating an unregistered securities exchange. That is quite a big problem for Coburn and the EtherDelta platform itself. The service is an actual exchange for trading ERC20 tokens, which does not impose any limitations based on the nature of the token in question.
Although one could argue EtherDelta is nothing more than a smart contract with a convenient user interface, the SEC sees things differently. More specifically, the code of the contract in question is designed by Coburn, and he takes responsibility for the actions performed by his code as such. Moreover, the code executes paired orders, which makes him indirectly responsible for every single trade taking place through this contract.
The SEC explains their scrutiny as follows:
“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.”
For the time being, it seems Coburn will not face any jail time or anything like that. Instead, he settled the dispute by paying over $385,000 in fees, penalties, and so forth. It does not appear EtherDelta will be shut down or modified in any way either, which is something to be happy about as an ERC20 user.