Founder of EtherDelta Charged by SEC for Operating an Unregulated Exchange

November 9, 2018 / by Angel Reyes

Zachary Coburn, founder of decentralized trading platform EtherDelta, has just been formally charged with operating an unregistered securities exchange by the U.S. Securities and Exchange Commission (SEC).

The SEC has found that EtherDelta has been offering the trading of ERC-20 tokens, a type of token often issued in Initial Coin Offerings (ICOs). Over an 18-month period, more than 3.6 million trades have been executed by the exchange — many of which fall under the regulatory category of securities.

The SEC’s report states that “(a)lmost all of the orders placed through EtherDelta’s platform were traded after the Commission issued its 2017 DAO Report. The report 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.”

EtherDelta has been trading in various tokens classified as DAO (Decentralized Autonomous Organization) Tokens without registering as an exchange or pursuing an exemption status.

DAO Tokens are assets sold to fund projects relating to a “virtual organization embodied in computer code and executed on a distributed ledger or 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.” said SEC Division of Enforcement Co-Director Stephanie Avakian.

Many of the creators of the tokens being traded have previously been pursued by the SEC for operating unregulated broker-dealer relationships or ICO offerings.

Coburn has been cooperative with the SEC and agreed to pay the $300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty. He has not however admitted to or denied the charges.

By cooperating, Coburn has escaped further penalties, according to the SEC.

The SEC’s demand for compliance is intended to protect investors in a time of rampant industry growth.