The SEC decision to indict EtherDelta founder Zachary Coburn for illegal trading of securities might have come across as a surprise to many in the crypto ecosystem, especially given that Zachary Coburn no longer owns the exchange. The regulatory stifling was somewhat palpable in the background when IDEX decided to block users from New York from trading. The crackdown on EtherDelta is in fact the SEC’s first enforcement action on a platform operated as an unregistered securities exchange. The response from the crypto community was along a spectrum and 0x also chimed in
; While some welcomed the intervention of regulators, viewing it as a sign of much-needed regulation that the space needs, some others were dismayed by the fact that the SEC would start with so-called ‘non-custodial’ exchanges, which were hitherto considered to be somewhat immune to regulatory crackdowns as these marketplaces advertise themselves technically as ‘bulletin boards’ with order matching happening between end-users on a peer-to-peer basis. This is unlike traditional exchange platforms that have centralized custody and order books. The SEC basically took the view that if it walks and quacks like a duck, it is probably a duck. If the UI and the underlying functionality, in this case, facilitating the exchange of tokens, are similar to that of a national securities exchange, then the platform is treated as an exchange and therefore should be a registered entity.
The SEC’s overarching UI aspect definitely brings all the 0x-based relayers in to focus and makes them vulnerable to charges by the regulator. It will be interesting to see how other decentralized exchanges react to this news and realign their business models accordingly.
A few things worth pointing out
- The fine of $350,000 at the personal level is a pretty steep fine, even assuming the individual in question possibly made a few millions from the exchange operations, or as is more likely, from early investments in BTC/ETH etc
- It does seem like there was not much protesting from the individual in question who just decided to accept the verdict and co-operate; This does seem like a ‘warm-up pitch’ by the SEC, a loosening of the limbs - get a quick win on an easy situation, get precedence sorted and now go selectively after some of the big fish.
- This will probably lead to an acceleration in the process of increased clustering of exchanges and other emerging crypto businesses with a high regulatory exposure (pretty much 99% of them) in ‘crypto’ offshore havens such as Gibraltar and Malta, much like the traditional fund management industries’ penchant for places such as the Caymans, Channel Islands, Mauritius, Guernsey, Gibraltar etc
- Cities like Dubai, Singapore and others might sense an opportunity as well, while traditional centres like NY, London etc will necessarily have to continue to be cautious
One thing is for sure, this is just the first turn of the regulatory screw, there is probably more where this came from. Fasten your seat belts.
(Also, some folks wrote in, in response to yesterday’s post that touched upon the pollution in Delhi and pointed out the huge power consumed by the bitcoin blockchain and the ensuing environmental impact of POW mining. To be fair, the jury is still out there, and in defence of POW, the ‘net impact’, after accounting for all the processes involved in the fiat money life cycle that it can potentially replace, is clearly positive, and POW mining is arguably hastening research into better green energy sources).