The big news this week was the SEC order
vs Etherdelta's founder Zach Coburn. In short the SEC has instituted a cease and desist order against Coburn for actively contributing to Etherdelta's violation of Section 5 of the Exchange Act (i.e. operating an unregistered securities exchange). Coburn settled for a grand total of $388K, without admitting to or denying the SEC findings.
To many, Etherdelta represented the archetypical "decentralized exchange", a virtual wild west were any token would have a market, anyone could have a piece of it without having to identify themselves and no one could stop.
While the site is seemingly still up and running (Coburn sold it to a Chinese acquirer at the end of last year), Coburn himself was a dead easy target for the agency:
- clearly identifiable as the sole founder
- residing in the US
- personally responsible for writing and deploying the smart contract
- retaining exclusive control of it and of the centralized servers that maintained the orders
- personally responsible for vetting which tokens would be listed
- including some whose issuer the SEC has already initiated actions against and many that had the hallmarks of securities
- and who was the front face of the exchange on many public forums (the order includes some of his reddit quotes)
So much for a "DEX" and yeah, presumably not a difficult case to win, so much so that Coburn settled. Also, presumably much easier and more symbolic than having to take down a smart contract (the Etherdelta smart contract was actually forked
and a similar front end appeared earlier this year). Which sheds some light on the broader SEC enforcement strategy.
Jake Chervinsky made
the excellent point that the Agency is deliberately going after the low hanging fruit to, presumably, build enough precedents ahead of more complicated and expensive cases against much better funded and lawyered-up entities. This action also reads a lot like a hidden message to the market: if you collaborate, it won't be that bad after all. We don't know, but ~$400k is potentially small change compared to what Coburn would have made from Etherdelta's profits and sale (interestingly the fact that he was personally profiting from running Etherdelta was not brought up in the order).The most pressing questions however still remain largely unanswered.
Which of the 500+ tokens that traded on Etheredelta were securities?
Would a "fully decentralized" exchange self-run by smart contracts on a blockchain ever fit the SEC definition of exchange ("maintains, or provides a market place"), and if it does, who would be liable for possible violations? A question that is reminiscent of the worrying comments from a CFTC commissioner a couple of weeks back on the possible liability of smart contract developers who could "reasonably foresee" violative uses of their code. And to add to that, the chief of the SEC’s cyber unit just told Forbes
that "using any blockchain to create an exchange without central operations doesn’t remove the original creator's responsibility".
A hugely important, complicated and scary
matter, which make us wonder on what side of the regulatory fence many other existing and new projects will fall. So what should we be expecting next?
- undoubtedly a wave of new enforcement actions will be hitting the press in the next 6-12 months (note this particular action was announced once settled, there are many others ongoing that we yet don't know about following the SEC's March '18 warning
- there's a material risk that US-based founders will lose drive to experiment in this space, compared to founders from other more friendly jurisdictions (perhaps the decentralized finance movement will start gravitating away from the US, are there any clear signs of this happening yet?)
- Any type of exchange with some centralized elements that potentially serves US based customers is likely to, at the very least, start implementing strict KYC/AML and/or IP-blocking (this is already happening, see Idex news from last week)
- however, it's only a matter of time before a truly unstoppable, ownerless version
of Etherdelta, seeded by a completely anonymous group of developers, makes its appearance. Back when the SEC issued the DAO report we figuratively predicted
that "a minority will go for war" and we are doubling down on that call: a wave of anonymous projects is upon us. Work and research on 'fully decentralized' exchanges is gaining traction
Ironically, regulation and enforcement can be a catalyst for accelerated innovation and even more decentralization, every time a bit more. Ultimately, the nature of technology is to move faster than the law, and we are probably not too far from a future described
by Alex Felix where autonomous agents will not only be executing code, but also writing it. Who'll be liable at that point?
---Other good reads on the topic:
- Jake Chervinsky's full tweetstorm
- Marco Santori's own thread
- Coindesk piece
featuring comments from Preston Byrne, Stephen Palley and Andrew Hinkes
- Peter Van Valkenburgh's take
on how DEX could be regulated
- Katherine Wu's always fresh perspective