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SEC settles with EtherDelta founder for running an unlicensed exchange [pdf] (sec.gov)
57 points by miohtama 5 days ago | hide | past | web | favorite | 32 comments





"Respondent Coburn shall pay disgorgementof $300,000 and prejudgment interest of $13,000, for a total of $313,000 ,to the Securities and Exchange Commission for transfer to the United States Treasury subject to Exchange Act Section 21F(g)(3)."

"Respondent Coburn shall, within 10 days of this Order, pay a civil money penalty of $75,000 to the Securities and Exchange Commission for transfer to the United States Treasury subject to Exchange Act Section 21F(g)(3)."

Total fine is under $400,000k. I am curious whether the enterprise was net positive factoring the fine into account.


I estimated he was making about $20,000 USD a week during the ICO boom, and he also sold the exchange to Asian buyers, so I believe he came out on top. Although dealing with the SEC is very expensive (your lawyers spend many hours on calls and assisting in discovery) and also it's nerve wracking.

Why would the SEC want them to not be net positive? Are they trying to dismantle the business or just ensure that they get their dues?

This was a fine imposed against the founder individually, not against EtherDelta, the company, which is owned by Asian investors.


That still sounds like a great return if it was just setup by one guy? Even if his legal and running costs were $2M - walking away with $10M would be great

The token sale was administrated by the Asian group that purchased EtherDelta from the founder.

During the boom, I was really glad that ED was around when I wanted to make large buys because it eliminated counter-party risk. With regular exchanges it was common to have withdrawals halted or have deposits not show up for hours with no support, if they showed up t all. Eventually they couldn't handle the volume and it fell apart but when it worked it was a godsend

Except it does not eliminate counterparty risk because it still has central points of failure it even got hacked and people lost money.

https://www.ccn.com/cryptocurrency-exchange-etherdelta-hacke...


When the exchange was launched, the SEC didn't mention that ether was a security or tokens for that matter. How can they came back years later and back-charge for things that were not illegal at the time? Seems largely unfair and plain greedy. Are 0x protocol relayers next to be charged by the SEC?

almost certainly yes

This is a great read and not overly long. For a legal filing from the SEC about a cryptocoin marketplace, it doesn’t get much better than this.

The size of the fine strongly indicates (in my totally non-expert opinion) that the SEC was actually deeply grateful to the EtherDelta founder for educating them about how his operation functioned and how this marketplace even worked. I wouldn’t be surprised if he helped write the document we just read.

This is not even a slap on the wrist, this is practically them saying “job well done, sir!”

The point of filing in the first place and ultimately reaching this agreement was clearly a learning experience for the SEC and a practice run for starting to better regulate this new technology.

They learned the ropes with a defendant who didn’t even own the company anymore, and basically hired him to consult for them. The plea lets the SEC put a feather in their hat and try to better establish that they want to regulate even smart-contract based non-custodial trading engines.

Which really kind of sucks because a truly non-custodial smart contract trading engine carries none of the risks that the national exchange regulations were designed to protect against, does it?

Maybe there is still manipulation of the order book that could occur.

And also, which specifically comes up in TFA, the fact that EtherDelta picked which securities were displayed in the book was a key aspect of them being an exchange. If you’re going to, even implicitly, endorse specific tokens, you are going to be subject to these regulations.

It would be great to know specifically how far back you would have to walk from the EtherDelta “line” before the SEC would not pursue enforcement. Is any centralization at all fatal?

I’m going to guess you need a fully decentralize trading book, and users need to explicitly identify the token they want to trade (i.e. by selecting the correct book) before there is no longer an individual person they could target as an exchange.

Basically, I am guessing, you have to get to a point where you aren’t even capable of collecting transaction fees beyond what the miners require to include the transaction in a block.

Overall a very interesting post.


This is why coinbase bought a broker dealer. And this is why you'll see a lot more BDs being setup to properly clear crypto trading.

BDs? What does that mean?


I am no libertarian, but this feels thoroughly unfair on a human level. EtherDelta was a noble pursuit in my book - it was useful, entrepreneurial and did not exploit anybody.

There's no doubt EtherDelta's system addressed many of the reasons traditional markets required regulation but EtherDelta is still a clear violation of the Exchange Act. All securities exchanges must be registered, most tokens are securities and EtherDelta was running an unregistered exchange selling those securities.

That being said, this is a classic example of the law failing to keep pace with technology. Up until a few years ago it was a given that exchanges required a neutral third party to facilitate transactions and that, in the interest of fairness and full disclosure, those market makers needed to be registered and regulated. The law simply does not contemplate a self-regulated exchange governed by smart contracts and a decentralized ledger.

U.S. regulators also tend to focus on compliance with black-letter law without giving much credence to compliance with the spirit of the law. In my opinion, this all-or-nothing approach stymies innovation because regulators and innovators become adversaries when they could and should be allies.


Yes, I'm also having a hard time understanding why is this illegal.

ICOs are mostly illegal unregistered securities so any service that trades those tokens is also illegal.

I'm not talking about ICOs. In fact, EtherDelta was one of the few projects that launched without an ICO, and before the ICO craze.

EtherDelta allows you to trade illegal securities, therefore EtherDelta is also illegal.

It allowed you to trade any ERC-20 token, indiscriminately. If you point an ERC-20 contract address to it, it would add it automatically to the user interface.

Also, I'm not talking about if it's illegal or not, the point that I can't get over is that the ED guy didn't scam or hurt anyone. It was an honest, transparent, open source project.


there are several issues at play: rules around trading securities and securities fraud. EtherDelta broke certain rules and that/s why the founder got fined about 400k in total. You are correct that EtherDelta wasn't a fraud or a scam - and that's why there is no criminal proceeding, no accusation of securities fraud.

the SEC doesn't give a shit.

if it quacks like a duck, looks like a duck, it's probably one in their eyes.


Coburn never would have settled if the SEC were that sloppy. You might disagree with the laws involved, but I'm pretty sure they had a decent legal case.

he's not in the clear from civil lawsuits which I'm sure this SEC settlement sets a precedent.

ICOs are securities so must be registered with the SEC.

Exchanges that trade securities must also be registered.

You can trade ICOs on an exchange as long as both are registered according to their respective laws...


Does anyone have a good high level summary of the complaint the SEC made? How does one avoid those type of accusations while being involved in the crypto space?

The "Summary" section in the PDF gives a pretty concise and straight-forward overview.

I'll read that. I was assuming the SEC report wouldn't have the backstory but maybe that is just the gossip hound in me.

Isn't etherDelta an etherium app/token/contract?

How is that different than running an etherium miner? Actually, didn't it run on an etherium miner? can you get a fee from a contract someone else mined because you are the author? well I guess so otherwise why would the creator be being fined? ...etherium is weird.


Sure it's just a contract, but the company still takes a cut (written in to the contract) when traders execute against orders. I'd assume that's what SEC wants their share of.



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