First Crypto Exchange Enforcement Action: SEC Settles Charges with Zach Coburn & EtherDelta Regarding Operation of an Unregistered Exchange

The Securities and Exchange Commission (SEC) has settled charges against Zachary Coburn, the founder of EtherDelta, a cryptocurrency exchange.

This is the SEC’s first enforcement action against a crypto exchange and marks a noted shift in the Commission’s dealing with secondary transactions of digital assets. The SEC has previously brought enforcement actions relating to unregistered broker-dealers and unregistered initial coin offerings (ICOs), including some of the tokens traded on EtherDelta.

Many crypto exchanges, or secondary marketplaces, have operated without the oversight of the SEC. EtherDelta, described as a digital token trading platform, was hit with allegations of operating as an unregistered national securities exchange.

According to the SEC’s order:

“EtherDelta’s website, launched by Coburn on July 12, 2016, provides a user-friendly interface to EtherDelta and resembles online securities trading platforms. For example, the website makes token “pairs” available for trading, provides access to the EtherDelta order book, and displays the current, top 500 firm bids and offers by symbol, price, and size. The website also displays account information for users of the EtherDelta platform (“Users”) (tracked by the User’s Ethereum address and maintained in an internal ledger) and provides fields for Users to input trading interest in any token pair. Users may enter orders to buy or sell specified quantities of any ERC20 token at a specified price (in Ether) and with a specified time-in-force. The website also displays to Users market depth charts and a list of confirmed trades.”

The SEC points to the date of the DAO report which has been described as a line in the sand moment for the Commission. Within the DAO report, the SEC “advised that a platform that offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, must register with the Commission as a national securities exchange or be exempt from registration.”

Apparently, Coburn and EtherData had not complied the regulatory request.

The SEC states that from July 12, 2016, to December 15, 2017, more than 3.6 million buy and sell orders in ERC20 tokens that included securities as defined by Section 3(a)(10) of the Exchange Act were traded on EtherDelta. Approximately 92% or 3.3 million were traded during the period following the DAO Report.

On December 16, 2017, Coburn sold his crypto exchange to foreign buyers and has not been associated with the exchange since.

“EtherDelta had both the user interface and underlying functionality of an online national securities exchange and was required to register with the SEC or qualify for an exemption,” stated Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

Avakian’s partner, Steven Peikin, Co-Director of the SEC’s Enforcement Division, added they are witnessing a time of significant innovation in the securities markets with the use and application of distributed ledger technology.

“But to protect investors, this innovation necessitates the SEC’s thoughtful oversight of digital markets and enforcement of existing laws.”

Coburn, without admitting or denying the findings, received what is effectively a slap on the wrist.  He consented to the order and agreed to pay $300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty. The SEC recognized Coburn’s willingness to cooperate in the enforcement action.

This SEC enforcement action is more than a shot across the bow of crypto exchanges, it is a sign that the Enforcement Division will be gunning for all other unregulated securities exchanges. Coburn was unlucky in being the first.

While Coburn and EtherData clearly transgressed existing securities law it highlights a nagging issue as to why, and when, the SEC will approve the various ATS applications for digital asset exchanges that seek to be fully regulated.


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