The founder of cryptocurrency trading platform EtherDelta settled with the SEC for operating an unregistered national securities exchange in the agency’s first case of this kind.

Zachary Coburn will pay $313,000 in disgorgement and interest and a civil fine of $75,000 to settle Securities and Exchange Commission allegations his crypto site acted as an unregistered securities exchange, the agency said.

Coburn created his platform, EtherDelta, in 2016, the SEC said. He previously spent almost five years as a registered representative with a Chicago-based, SEC-registered options trading firm, according to the settlement order. In settling, Coburn neither admitted nor denied wrongdoing.

In its 2018 Annual Report, the SEC detailed the Division of Enforcement’s efforts on issues related to initial coin offerings and digital assets.

The following are updates to the Digital Currency, Blockchain, FinTech Regulatory Relief, and ICO Trackers, available on Bloomberg Law, from the week of November 5-9, 2018. They include U.S. federal, U.S. state, and foreign government actions affecting the use of digital currency and blockchain, and regulatory enforcement actions and private class action litigation against ICOs.

Digital Currency / Blockchain

United Kingdom: Cryptoassets Taskforce: Final Report

  • The final report of the Cryptoassets Taskforce from HM Treasury, the Financial Conduct Authority, and Bank of England launched in March 2018, issued on October 29, concluded that while distributed ledger technology (DLT) is at an early stage of development, it has the potential to deliver significant benefits in financial services and other sectors in the future, and all three authorities will continue to support its development.
  • The report concluded that there are substantial potential risks associated with cryptoassets, and the most immediate priorities for the authorities are to mitigate the risks to consumers and market integrity, and prevent the use of cryptoassets for illicit activity.
  • The report sets out actions the authorities will take to deliver these objectives, including preventing financial crime, regulating financial instruments that reference cryptoassets, clarifying the regulation of security tokens, consulting on extending the regulatory perimeter for ICOs, addressing the risks of exchange tokens, ensuring a coordinated international approach, improving consumer awareness, and maintaining financial stability.
  • The Taskforce will convene every six months to consider developments and review the U.K.’s approach.


CFTC: Commissioner Quintenz Remarks on Liability for CFTC Regulation Violations on Blockchains

  • CFTC Commissioner Brian Quintenz stated in his remarks at the GITEX Technology Week Conference in Dubai on October 16 that the CFTC could prosecute “core developers” who write the foundational open-source software underlying a public blockchain used to create and execute smart contracts, but typically do not play an active in managing the blockchain, if they could reasonably foresee at the time that they created the code that it would likely be used by U.S. persons in a manner violative of CFTC regulations.
  • Commissioner Quintenz acknowledged that enforcement actions against core developers would not immediately stop activity violating CFTC regulations from occurring because individual users could continue to use the blockchain to execute their own smart contracts, and that the variability of international regulations creates further complications.
  • Engagement with innovators rather than enforcement actions against them was Commissioner Quintenz’s stated preference. He pointed out that the CFTC created its LabCFTC program for precisely this reason.
  • The idea that “the code is law” was refuted with the statement, “Case law, statutes, and regulations are the law. They apply to the code, just as they apply to other activities, contracts, or agreements.” As examples of code issues in which the CFTC may consider intervening, Commissioner Quintenz pointed out the existence of the risk of a 51% attack on a blockchain, the code bug in The DAO that allowed the theft of 3.6 million ether, and arranged default scenarios.
  • Remarks of Commissioner Brian Quintenz at the 38th Annual GITEX Technology Week Conference

ICOs / Digital Currency

Federal Enforcement Actions: First SEC Enforcement Action for Operating an Unregistered National Securities Exchange

  • The SEC on November 8 announced charges against Zachary Coburn, founder of the EtherDelta digital token trading platform, which it had settled with a cease and desist order. EtherDelta is an online platform for secondary market trading of ERC20 tokens, a type of blockchain-based token commonly issued in Initial Coin Offerings (ICOs). EtherDelta users executed more than 3.6 million orders for ERC20 tokens, including tokens that are securities, and almost all of the orders were traded after the SEC issues its 2017 Report on Examination on The DAO. The cease and desist order found that Coburn caused EtherDelta to operate as an unregistered national securities exchange.
  • The settlement is the SEC’s first enforcement action based on findings that a digital token trading platform operated as an unregistered national securities exchange.
  • In re Coburn, Release No. 34-84553, Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (November 8, 2018)
  • SEC Press Release: SEC Charges EtherDelta Founder With Operating an Unregistered Exchange

Federal Enforcement Actions: U.S. Securities and Exchange Commission Division of Enforcement Annual Report 2018

  • The Division of Enforcement described its focus on issues related to ICOs and digital assets, led by the Cyber Unit, in its 2018 Annual Report.
  • The report stated that “exuberance around these markets can sometimes obscure the fact that these offerings are often high-risk investments. For instance, the issuers may lack established track records, viable products, business models, or the capacity for safeguarding digital assets from theft by hackers. And some of the offerings are simply outright frauds cloaked in the veneer of emerging technology.”
  • The report described the Division’s actions with respect to ICOs and digital assets as taking four forms:

1. Public statements to send messages to the ICO and digital asset marketplace on issue

2. Enforcement actions when warranted, with over a dozen stand alone enforcement actions involving digital assets and ICOs as of the close of FY 2018, and dozens of investigations involving ICOs and digital assets in the past year

3. Actions against parties beyond the issuers of ICOs

4. Recommending that the Commission use its trading suspension authority to prevent investors from being harmed by possible scams, with trading in the stock of over a dozen publicly traded issuers suspended in FY 2017 and FY 2018 because of questions concerning, among other things, the accuracy of assertions regarding their investments in ICOs and operation of cryptocurrency platforms.

Mauritius: License for Digital Asset Custodian Services Proposed