SEC Ends 2018 Signaling Its Approach to Regulating the Cryptocurrency Markets

• Published in: Insights; the Corporate & Securities Law Advisor 2019-02, Vol.33 (2), p.30-35
• Main Authors: Sikora, John J, Wink, Stephen P, Yatter, Douglas K, Kates, Cameron R
• Format: Article
• Language: English
• Subjects: Angel investors; Blockchain; Celebrities; Claims processing; Corporate profits; Digital currencies; Enforcement; Fines & penalties; Injunctions; Litigation; Marketing; Registration; Securities offerings; Social networks; Stock brokers; Stock exchanges; Violations
• ISSN: 0894-3524

First Token Exchange Enforcement Action On November 8, 2018, the SEC instituted and settled a first-of-its-kind enforcement action against Zach Coburn, founder and former owner of EtherDelta, a token trading platform, for operating an unregistered exchange in violation ofthe Securities Exchange Act of 1934 (Exchange Act) (EtherDelta Order).2 According to the EtherDelta Order, 3.6 million buy and sell orders for tokens were executed on EtherDelta from July 2016 to December 2017.3 The SEC noted that approximately 3.3 million of these tokens were traded after the SEC's publication of the DAO Report on July 25, 2017,4 which warned that digital assets that are securities must be traded on a registered securities exchange or through a broker-dealer.5 Exchange Act Rule 3b-16(a) provides that a platform falls within the definition of a national securities exchange if it both: * Brings together the orders for securities of multiple buyers and sellers; and * Uses established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of the trade.6 The SEC concluded that EtherDelta met these criteria by operating a website that offered buyers and sellers access to the EtherDelta order book, which received and stored orders, and displayed the top 500 firm bids and offers (including token symbol, size, and price). Registration of the tokens as securities under the Exchange Act and compliance with its requirements and ongoing reporting is an expensive endeavor. [...]given that the tokens will now unequivocally be treated as securities, those same tokens may not be exchanged on their respective networks, unless the networks are registered as intermediaries (i.e., a broker-dealer or exchange). [...]purchasers may conclude that the tokens are unlikely to retain their value and that they are better off seeking immediate compensation through the Claims Process.20 It is also difficult to see how these platforms will survive these "remedial" steps, given that the above measures undercut the fundamental nature of their networks. [...]the Public Announcement serves to remind parties involved in secondary token sales that they are responsible for determining whether such tokens are securities.