SEC busts EtherDelta for unregistered securities trading

Andrew Munro

Posted: 9 November 2018 11:55 am News

Not even the blockchain is above the law, when a responsible smart contract author can be found.

• The SEC has fined former EtherDelta founder Zachary Coburn for unregistered securities trading between 12 July 2016 and 15 December 2017, and issued a cease and desist order.
• The basis of the judgement was that Coburn wrote the offending trading smart contract and controlled EtherDelta's operations, and "should have known that his actions would contribute to EtherDelta's violations".
• The judgement may have implications for the future enforcement of illegal smart contracts, and the operation of decentralised exchanges.

On 8 November the SEC released its cease and desist order and penalties levied against Zachary Coburn, founder of the EtherDelta exchange.

It also explored the legal issues at hand, noting that the smart contract which carried out the trading "resides" on the Ethereum blockchain, and that other parties such as miners are involved in the execution of the offending trades.

It cited the DAO Report of 25 July 2017 in which the SEC advised that platforms which offer trading of digital assets that are securities and operate as "exchanges", as defined by federal securities laws, must either register as securities exchanges or get an exemption. EtherDelta did neither.

"During the relevant period [of 12 July 2016 to 15 December 2017], Coburn founded EtherDelta, wrote and deployed the EtherDelta smart contract to the Ethereum Blockchain, and exercised complete and sole control over EtherDelta's operations, including over the operations constituting the violations described... Coburn should have known that his actions would contribute to EtherDelta's violations and thus, under Exchange Act Section 21C(a), caused EtherDelta to violate Section 5 of the Exchange Act," the SEC found.

The order acknowledges that Coburn cooperated with the SEC, agreed to a settlement and "facilitated the staff's investigation into an emerging technology". He is paying a total of $388,000 in penalties.

Opinion: What this might mean

There are several issues at hand.

Firstly, there's the fact that the SEC is enforcing these laws. Given the potentially quite broad definition of securities as it may apply to cryptocurrencies, there are probably plenty of other exchanges which are in violation. Whether they're going to be hit with the SEC stick may depend on whether there is a potentially culpable person residing in the United States, as Coburn, a Chicago resident, is.

Significantly, it also suggests a potential decision that the writers of illegal smart contracts might be found liable for the illegal actions of their contracts, especially if they live in the United States. The Ethereum blockchain is seemingly beyond the bounds of any jurisdiction, but smart contract authors may not be.

On the whole, this might suggest that if there's a place where smart contracts and blockchains land in an established jurisdiction, and culpability can be found, even the blockchain isn't above the law.

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA

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