SEC Charges Crypto Operator over Unregistered ‘Security Tokens’

securities exchange commission sec

It is no longer news that the United States Securities and Exchange Commission (SEC) has prioritized its activities against cryptocurrency-related crimes. The commission disclosed this as part of its annual report released at the beginning of this month.

The commission seems to be walking its talk as it has faulted Zachary Coburn, the founder of crypto token trading platform EtherDelta of operating an unregistered securities exchange. In the charge brought against Coburn on Thursday, the SEC noted that EtherDelta was serving as a marketplace that allowed buyers and sellers to trade ethereum tokens that the SEC considered to be digital asset securities.

SEC explained:

“EtherDelta’s smart contract was coded to validate the order messages, confirm the terms and conditions of orders, execute paired orders, and direct the distributed ledger to be updated to reflect a trade.”

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The commission made more indicting remarks about EtherDelta in its press release noting that the exchange continued to trade the so-called security tokens after the commission’s landmark DAO report.

The statement read:

“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.”

During an 18-month review period, SEC noted that the crypto operator used an order book, an order display website and a smart contract built on ethereum to conduct more than 3.6 million trades including tokens that are securities under the federal securities law, without due registration as an exchange.

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“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,” explained Stephanie Avakian, co-director of SEC’s Division of Enforcement.

Penalty Agreed and Settled

The commission acknowledged Coburn for his cooperation, which according to it, helped lower his penalty for the offense. Although he neither admits nor denies the charges, the operator agreed to pay $300,000 in disgorgement and $13,000 in pre-judgment interest as well as a penalty of $75,000. The statement noted that Coburn has already settled the charges.

To avoid confusion over which tokens are deemed security tokens and which are not, the SEC is preparing a comprehensive document which will serve as a fool’s guide. As Smartereum reported, a director of the commission, William Hinman while speaking at the D.C. Fintech Week, said the commission was preparing a guide which written in “plain English” to help ICO developers and investors distinguish security tokens. Not only will the guide clarify security tokens, but Hinman also explained that it will provide step by step instructions on how to fulfill the SEC requirements if it is deemed a security token.

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