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SEC settles with EtherDelta founder for running an unlicensed exchange [pdf]

57 points by miohtama 8y ago

deleted 8y ago
[deleted]
TrainedMonkey 8y ago
"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.
- riazrizvi 8y ago
  They were barely able to raise $12mm (https://www.google.com/amp/s/amp.reddit.com/r/EtherDelta/comments/7qdpob/etherdelta_completes_token_sale_raises_over_12/ https://www.google.com/amp/s/amp.reddit.com/r/EtherDelta/com...)
  - cstrat 8y ago
    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
    - omarchowdhury 8y ago
      The token sale was administrated by the Asian group that purchased EtherDelta from the founder.
- seibelj 8y ago
  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.
- shawnz 8y ago
  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?
  - deleted 8y ago
    [deleted]
  - crazypyro 8y ago
    This was a fine imposed against the founder individually, not against EtherDelta, the company, which is owned by Asian investors.
anonu 8y ago
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.
- xrd 8y ago
  BDs? What does that mean?
  - fomojola 8y ago
    Broker Dealer: https://en.wikipedia.org/wiki/Broker-dealer https://en.wikipedia.org/wiki/Broker-dealer
alistproducer2 8y ago
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
- dangero 8y ago
  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-hacked-in-dns-hijacking-scheme/ https://www.ccn.com/cryptocurrency-exchange-etherdelta-hacke...
zeroname 8y ago
If you want to part fools from their money, you better go into alternative medicine, that's far less of a legal risk.
xrd 8y ago
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?
- vvpan 8y ago
  The "Summary" section in the PDF gives a pretty concise and straight-forward overview.
  - xrd 8y ago
    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.
vvpan 8y ago
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.
- bouncycastle 8y ago
  Yes, I'm also having a hard time understanding why is this illegal.
  - wmf 8y ago
    ICOs are mostly illegal unregistered securities so any service that trades those tokens is also illegal.
    - anonu 8y ago
      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...
    - bouncycastle 8y ago
      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.
      - browsercoin 8y ago
        the SEC doesn't give a shit. if it quacks like a duck, looks like a duck, it's probably one in their eyes.
        solveit 8y ago
        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.
gcbw2 8y ago
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.
- leetbulb 8y ago
  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.
zaroth 8y ago
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.
miguelmota 8y ago
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?
- arthurcolle 8y ago
  almost certainly yes

57 points by miohtama 8y ago

deleted 8y ago

[deleted]

"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.

riazrizvi 8y ago
They were barely able to raise $12mm (https://www.google.com/amp/s/amp.reddit.com/r/EtherDelta/comments/7qdpob/etherdelta_completes_token_sale_raises_over_12/ https://www.google.com/amp/s/amp.reddit.com/r/EtherDelta/com...)
- cstrat 8y ago
  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
  - omarchowdhury 8y ago
    The token sale was administrated by the Asian group that purchased EtherDelta from the founder.
seibelj 8y ago
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.
shawnz 8y ago
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?
- deleted 8y ago
  [deleted]
- crazypyro 8y ago
  This was a fine imposed against the founder individually, not against EtherDelta, the company, which is owned by Asian investors.

anonu 8y ago

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.

xrd 8y ago
BDs? What does that mean?
- fomojola 8y ago
  Broker Dealer: https://en.wikipedia.org/wiki/Broker-dealer https://en.wikipedia.org/wiki/Broker-dealer

alistproducer2 8y ago

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

dangero 8y ago
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-hacked-in-dns-hijacking-scheme/ https://www.ccn.com/cryptocurrency-exchange-etherdelta-hacke...

zeroname 8y ago

If you want to part fools from their money, you better go into alternative medicine, that's far less of a legal risk.

xrd 8y ago

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?

vvpan 8y ago
The "Summary" section in the PDF gives a pretty concise and straight-forward overview.
- xrd 8y ago
  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.

vvpan 8y ago

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.

bouncycastle 8y ago
Yes, I'm also having a hard time understanding why is this illegal.
- wmf 8y ago
  ICOs are mostly illegal unregistered securities so any service that trades those tokens is also illegal.
  - anonu 8y ago
    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...
  - bouncycastle 8y ago
    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.
    - browsercoin 8y ago
      the SEC doesn't give a shit. if it quacks like a duck, looks like a duck, it's probably one in their eyes.
      - solveit 8y ago
        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.

gcbw2 8y ago

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.

leetbulb 8y ago
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.

zaroth 8y ago

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.

miguelmota 8y ago

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?

arthurcolle 8y ago
almost certainly yes