Jay Clayton, chairman of U.S. Securities and Exchange Commission (SEC).


SEC Strikes Back: The Meaning of the Coburn Cuff

Allon Sinai
08 November, 2018
1 min read

The U.S. Securities and Exchange Commission announced on Thursday that it has fined Zachary Coburn, the founder of digital token trading platform EtherDelta, a total sum of $388,000 in disgorgement, plus prejudgment interest and a penalty. Cobrun accepted the verdict without admitting or denying the findings, that according to the SEC led to a first-ever enforcement action against a crypto platform operating as an unregistered national securities exchange.

What is EtherDelta?

EtherDelta is an online platform for secondary market trading of ERC20 tokens commonly issued in Initial Coin Offerings (ICOs). Over an 18-month period its users executed more than 3.6 million orders for ERC20 tokens. EtherDelta had an "open listing" system, which allowed any user to trade any token they liked.

Why was Coburn fined?

The SEC claimed that some of the tokens ordered on EtherDelta (without specifying an exact amount) were securities under the federal securities laws. Almost all of the orders placed through EtherDelta's platform were traded after the Commission issued its 2017 DAO Report, which concluded that certain digital assets, such as DAO tokens, 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. Coburn was punished even though he left EtherDelta in late 2017, with the SEC citing trades that took place between July 12, 2016, the date the platform was launched, and December 17, 2017.

What is the DAO report?

DAO stands for Decentralized Autonomous Organization, which is a term used by the SEC to describe a “virtual” organization embodied in computer code and executed on a distributed ledger or blockchain. The report, published on July 25, 2017, cautioned market participants that offers and sales of digital assets, as in ICOs, are subject to the requirements of the federal securities laws. 

What's next?

EtherDelta is still alive and kicking, with the SEC order only targeting Coburn and not the company. From a broader perspective, it's not clear whether the SEC is claiming that a token that comes out of an ICO is itself a security, or that only the contract between a seller and buyer qualifies as one. Earlier this week, SEC director of Corporation Finance William Hinman, speaking at the D.C. Fintech Week conference, said there are plans to release "plain English" guidance for developers to refer to and determine on their own whether their potential token offering may be classified as a security or not, though it's not clear when the guidance will be published. This could be the first of many charges brought forward by the SEC, which has been warning about "potentially unlawful online platforms for trading digital assets" since March and is believed to currently be conducting dozens of investigations at different stages. Despite the hefty fine, Coburn wasn't banned from participating in capital markets and the platform continues to operate. Coburn cooperated with the SEC, which may be sending a message that anyone running a similar platform can reach out to the agency, pay a fine and then file a registration and get back to work.

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