SEC Gets Tough
Robert Cohen, the chief of the SEC’s cyber unit, announced an investigation into an Ethereum Blockchain-based exchange. According to Cohen, even if the creators form an exchange using blockchain, the creator remains responsible throughout its operations.
The blockchain is almost everywhere. Very recently, Blockchain LLC revealed its intention to develop 67,000 acres Nevada desert into a smart city. According to the CEO and founder of Blockchain LLC, the company will power this city with blockchain technology. The astute class action lawyer and a cryptocurrency investor want to develop a city running all its governance on blockchain technology and transacting on cryptocurrencies.
Lately, there has been a noted rise in exchanges working on decentralized platforms. Importantly, what is worrying SEC is the frequency and ease with which the entrepreneurs launch these blockchain-based firms. However, the SEC’s recent warnings indicate that the commission is serious about introducing some restrictions.
SEC scrutinized the founder of EtherDelta, an Ethereum blockchain-based exchange because he did not register his exchange with SEC. The commission also found the secondary marketplace for ERC20 tokens’ founder guilty of not operating as per exemption rules. According to a report, it is necessary for an exchange to get permission from the SEC if it is trading “securities” tokens. The SEC published this ruling on the Decentralized Autonomous Organization (DAO) on July last year when fraudsters hacked DAO in 2016. It resulted in dividing the original Ethereum blockchain platform into Ethereum (ETH) and Ethereum Classic (ETC).
According to Cohen, “The focus is not on the label you put on something or the technology you’re using. The focus is on the function, and what the platform is doing. Whether it’s decentralized or not, whether it’s on a smart contract or not, what matters is it’s an exchange.” Individual operators run the traditional and centralized exchanges like Nasdaq and Coinbase. However, the decentralized Ethereum exchanges running on blockchain use self-executing code for functioning.
There is no middleman or intermediary in such exchanges as they connect the sellers and buyers directly using smart contract or the code. However, Cohen thinks that even though the operation is entirely automatic, the person behind the code is responsible for these operations.
SEC Charges Zachary Coburn
In the case of EtherDelta, SEC did not charge the exchange but instead charged Zachary Coburn. Coburn founded the unlicensed decentralized token exchange. The SEC stated that Coburn is cooperative. Reports indicate that he is willing to pay a fine of $300,000. This is the sum that he earned as a commission by offering trading services on EtherDelta’s platform.
The platform that executed 3.6 million orders until last month fulfilled its most recent order on November 9. According to the co-director of Enforcement Division at SEC, Stephanie Avakian, since EtherDelta uses both the user interface as well as underlying functionality which are a part of an online national securities exchange, it should have registered with the SEC or at least fulfilled requisites for exemption.