REPORT: ETHERDELTA SEC TEA LEAVES: What Are The Regulatory Lessons To Be Learned From An Exchange Shut Down?

The Securities and Exchange Commission (SEC) announced on Thursday that it settled charges against Zachary Coburn, the founder of EtherDelta, a digital “token” trading platform. This is the SEC’s first enforcement action against a platform operating as an unregistered national securities exchange.1

The SEC stated that over an 18-month period, EtherDelta’s users executed more than 3.6 million orders for ERC20 tokens, including tokens that are securities under the federal securities laws.2 Almost all of the orders placed through EtherDelta’s platform were traded after the SEC issued its 2017 DAO Report, which concluded that certain digital assets 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.3

Without admitting or denying the findings, Coburn consented to the order and agreed to pay $300,000 in disgorgement, plus $13,000 in prejudgment interest, and a $75,000 penalty.4 The order also recognizes Coburn’s cooperation, which the SEC considered in determining not to impose a greater penalty.5

SEC Warned Exchanges of Registration Concerns in March

The SEC issued a statement in March asserting that it will continue to “focus on platforms that offer trading of digital assets and their compliance with the federal securities laws” to protect investors.6

The statement also reiterates the SEC’s position that platforms that offer “trading of digital assets that are securities and operates as an ‘exchange,’ as defined by the federal securities laws, must register as a national securities exchange or be exempt from registration.”7

Despite these Warnings, Exchanges Did Not Register with the SEC

In early June, Brett Redfearn, SEC Director of the Division of Trading and Markets, raised concerns over the lack of self-reporting by digital asset exchanges. Redfearn stated that the SEC was “underwhelmed by the enthusiasm for coming within the regulatory structure.”8

Redfearn also explicitly stated that there are a “number of exchanges out there trading ICOs” and the SEC would like to see “more registrations” from these existing digital asset exchanges.9

Digital asset firms may have initially declined to self-report with the SEC because they feared the SEC may take enforcement action against them. Exchanges may also have been reluctant to self-report, as they were waiting for concrete guidelines to be issued by SEC. In some cases, exchanges may have been unwilling to register, as they would have had to de-list unregistered digital assets, which would have reduced earnings.

Exchanges Considering Registering with the SEC

In May, Kraken’s Chief Executive Officer Jesse Powell said that the company would “probably get registered” with the SEC. The firm, however, qualified its statement by noting that before it registered, it would require “more clarity from the regulator about which digital coins are securities and how those tokens can trade legally.”10

In June, Prometheum Inc. filed for registration with the SEC to establish an exchange to conduct secondary trading of digital assets.11

Jeremy Allaire CEO of Circle Internet Financial Ltd. (“Circle”) also confirmed in June that the firm had discussed registering as an exchange with the SEC. Allaire stated that the company was interested in becoming a registered exchange through the SEC application process or by purchasing a platform that is already registered with the SEC.12

Digital Asset Firms Acquiring or Partnering with Companies Already Registered with the SEC

Circle is not the only firm to consider forgoing registering with the SEC and purchasing a company already licensed as an exchange.

In June, Coinbase, Inc. (“Coinbase”) announced that it acquired Keystone Capital Corp., (“Keystone”) a financial-services firm. The acquisition of Keystone will allow Coinbase, after receiving federal approval, to take part in broker-dealer, digital asset exchange, and investment advisor activities.13, 14

Other firms are partnering with existing companies that are already licensed as an exchange. In August, Bittrex announced it was partnering with Rialto Trading Technology (“Rialto”), a U.S.-registered trading platform for fixed income products. Under terms of the agreement, Rialto will expand its exchange operations to include digital assets that are registered securities.15

Penalties Against Firms that Self-Report May be Limited

The case against Coburn indicates that the SEC is willing to reduce penalties for individuals who cooperate with investigations. Coburn’s cooperation in the investigation only resulted in a low-six-figure fine. Coburn was not banned from participating in any market activities.16

Operators of unregistered exchanges may take this as an indication that it is time to register with the SEC. If so, the enforcement action against Coburn may herald a wave of registrations.

SEC Likely to Intensify Enforcement Efforts against Unlicensed Exchanges, but Direction of Future Investigations Unclear

If exchanges do not register, the SEC will likely bring more cases against unlicensed digital asset exchanges.

Based on the SEC order against Coburn, however, it may be difficult for market participants, advisors, and investors to determine the direction of future SEC enforcement actions.

The SEC would likely initiate an investigation against an unregistered decentralized exchange that, like EtherDelta, provides a marketplace for bringing together buyers and sellers for digital asset securities through the combined use of an order book, a website that displayed orders, and a “smart contract” that operated on the Ethereum blockchain.17

The SEC would also likely initiate an investigation into an unregistered decentralized exchange that uses smart contracts that are 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.18

The order against Coburn, however, does provide the market participants with a basic understanding of which digital assets are explicitly considered securities by the SEC. This will likely be clarified in future enforcement actions or-more likely-through the issuance of comprehensive digital asset guidelines that eventually will be issued by the SEC.


This report was prepared by Trifin Roule.

For nearly two decades, Mr. Roule provided for the U.S. government legal analysis of anti-money laundering, counterproliferation financing and counterterrorist financing laws and regulations dozens of jurisdictions, and international standards, as detailed through intergovernmental bodies (e.g. Financial Action Task Force (FATF)), and financial institutions (e.g. banks’ financial intelligence units and compliance offices).

In addition, Mr. Roule has provided in-depth analysis of digital asset accounting, auditing, customer due diligence, exchange, licensing, mining, initial coin offering (ICO), private key storage, and record-keeping practices and regulations.

Mr. Roule is a former Assistant Editor at the Journal of Money Laundering Control, a peer-reviewed journal that provides detailed analysis and insight on the latest issues in the law, regulation and control of money laundering and related matters. Mr. Roule has published dozens of articles on anti-money laundering, and counterterrorist financing laws and regulations.

Trifin Roule is the Publisher of our new division, Abacus Legal, and his and his team’s reports will be free to read for the next 45 days. After that time they will be dubbed premium content and require a subscription.


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  2. “SEC Charges EtherDelta Founder With Operating an Unregistered Exchange,” U.S. Securities and Exchange Commission Press Release, November 2018, https://www.sec.gov/news/press-release/2018-258/ (accessed 12 November 2018).
  3. “SEC Charges EtherDelta Founder With Operating an Unregistered Exchange,” U.S. Securities and Exchange Commission Press Release, November 2018, https://www.sec.gov/news/press-release/2018-258/ (accessed 12 November 2018).
  4. “SEC Charges EtherDelta Founder With Operating an Unregistered Exchange,” U.S. Securities and Exchange Commission Press Release, November 2018, https://www.sec.gov/news/press-release/2018-258/ (accessed 12 November 2018).
  5. “SEC Charges EtherDelta Founder With Operating an Unregistered Exchange,” U.S. Securities and Exchange Commission Press Release, November 2018, https://www.sec.gov/news/press-release/2018-258/ (accessed 12 November 2018).
  6. “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets,” Divisions of Enforcement and Trading and Markets, U.S. Securities and Exchange Commission, Public Statement, 7 Match 2018
    https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading (accessed 12 November 2018).
  7. “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets,” Divisions of Enforcement and Trading and Markets, U.S. Securities and Exchange Commission, Public Statement, 7 Match 2018
    https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading (accessed 12 November 2018).
  8. ”SEC director ‘underwhelmed’ by rate of cryptocurrency exchanges self-reporting,” CNBC, https://www.cnbc.com/2018/06/06/sec-underwhelmed-by-rate-of-cryptocurrency-exchanges-self-reporting.html (accessed 12 November 2018).
  9. ”SEC director ‘underwhelmed’ by rate of cryptocurrency exchanges self-reporting,” CNBC, https://www.cnbc.com/2018/06/06/sec-underwhelmed-by-rate-of-cryptocurrency-exchanges-self-reporting.html (accessed 12 November 2018); and “Here’s what the SEC’s trading and markets division director had to say about the crypto market (video),” CNBC, 6 June 2018, https://www.cnbc.com/video/2018/06/06/sec-trading-markets-division-crypto.html (accessed 12 November 2018).
  10. “Crypto Exchange Kraken Says It Will Probably Register With SEC,” Bloomberg, 15 May 2018, https://www.bloomberg.com/news/articles/2018-05-15/crypto-exchange-kraken-says-it-will-probably-register-with-sec (accessed 12 November 2018).
  11. “Prometheum, Inc. Enters into a Strategic Partnership with Registered Broker-Dealer Manorhaven Capital LLC, Files for Registration as Alternative Trading System,” AP News, 19 June 2018, https://www.apnews.com/b25503ea7c2e953c8447c55c4774fdc9 (accessed 12 November 2018).
  12. “Crypto Unicorn Circle Aims to Expand Into Regulated Banking,” Bloomberg, https://www.bloomberg.com/news/articles/2018-06-06/circle-in-talks-with-u-s-to-become-licensed-bank-trading-venue (accessed 12 November 2018).
  13. “Our path to listing SEC-regulated crypto securities,” Coinbase Blog, https://blog.coinbase.com/our-path-to-listing-sec-regulated-crypto-securities-a1724e13bb5a (accessed 12 November 2018).
  14. Coinbase Expands With Deal for Broker-Dealer Keystone Capital, Wall Street Journal, 6 June 2018, https://www.wsj.com/articles/coinbase-expands-with-deal-for-broker-dealer-keystone-capital-1528321468
  15. Cryptocurrency exchange Bittrex teams with registered trading venue Rialto, Reuters, 23 August 2018, https://www.reuters.com/article/us-crypto-currencies-bittrex/cryptocurrency-exchange-bittrex-teams-with-registered-trading-venue-rialto-idUSKCN1L81BG (accessed 12 November 2018).
  16. “SEC Charges EtherDelta Founder With Operating an Unregistered Exchange,” U.S. Securities and Exchange Commission Press Release, November 2018, https://www.sec.gov/news/press-release/2018-258/ (accessed 12 November 2018).
  17. “SEC Charges EtherDelta Founder With Operating an Unregistered Exchange,” U.S. Securities and Exchange Commission Press Release, November 2018, https://www.sec.gov/news/press-release/2018-258/ (accessed 12 November 2018).
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