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On Nov 8, 2018 the Securities and Exchange Commission (SEC) announced that it would be creating a series of charges against Zachary Coburn. Coburn is the founder of EtherDelta which is a trading platform that specializes in trading of digital assets, or cryptocurrencies.
The charges laid come as a result of findings that the platform was operating without a registration which is required by law in the United States; any cryptocurrency or token exchange must have a proper registration with the national securities exchange in order to legally carry out their business.
Under the ruling, the ERC20 tokens and other initial coin offerings (ICOs) from the company were forced to be taken offline as a result of its illegal operation. EtherDelta was responsible for facilitating trade between buyers and sellers for these digital assets and more. The exchange had a website as well as an order book that was responsible for categorizing and logging orders. Many of their tokens worked on the same concept as smart contract with the Ethereum blockchain as the backing.
The users were trading nearly 3.6 million tokens each day with just ERC20 alone; other tokens were also traded on the platform but operations have now been stopped completely. Over the 18 months the exchange was live, it was stated that the website was responsible for trading securities without a license. In this case, the token values and digital currency were considered securities because the web servers were operating on US soil.
The shutdown and prosecution comes as a result of negligence on the part of EtherDelta. They had a full interface with unprecedented functionality and quick trading but they failed to register with the SEC or research a status for their exemption.
In cases such as this one, we are actually running into areas where technology in finance and cryptocurrency is advancing beyond the law. With these rapid innovations it also falls upon the creators of this tech to necessitate a compliance with current legal restrictions.
The SEC has continued to display actions of enforcement towards unregistered broker dealers as well as initial coin offerings. EtherDelta is not an exception and a number of smaller exchanges have been target as well. As a result of the charges facing EtherDelta, Coburn was forced to pay a 300,000 fine, a $75,000 penalty and $13,000 in prejudgement interest. A failure to take the exchange offline before a compliance was reached would also impose greater penalties.
If you are considering developing and working with blockchain technology to create your own exchange or even start your own ICO, it is highly important to consider compliance before launching your new platform!