SEC Cyber Security Chief Makes Warning to Decentralized Cryptocurrency Exchanges

News and Analysis

Using any blockchain to create an exchange without central operations doesn’t remove the original creator’s responsibility. This was the warning Robert Cohen, the chief of the SEC’s newly created cyber unit, made in the wake of the charges the U.S. securities regulator had filed against Zachary Coburn, the founder of EtherDelta, an Ethereum-based decentralized exchange.

While traditional, centralized exchanges like Coinbase, are run by individuals, decentralized exchanges are run by a self-executing code. Rather than connecting buyers with sellers, these exchanges don’t act as intermediaries using smart contracts to connect people directly.

However, as Robert Cohen emphasized, the individuals who create those codes are still responsible for them.

“The focus is not on the label you put on something or the technology you’re using,” he told The Forbes. “The focus is on the function, and what the platform is doing. Whether it’s decentralized or not, whether it’s on a smart contract or not, what matters is it’s an exchange.”

It’s notable, that the SEC’s charges last week were not against the exchange, which is still operational, but its founder, Zachary Coburn. He was charged with operating an unregistered securities exchange.

According to the release, EtherDelta, which acts as a secondary market for trading ERC-20 tokens, had been providing a marketplace for buyers and sellers to trade Ethereum tokens that the SEC deemed to be “digital asset securities.”

“EtherDelta’s smart contract was coded to validate the order messages, confirm the terms and conditions of orders, execute paired orders, and direct the distributed ledger to be updated to reflect a trade,” the SEC said.

EtherDelta users conducted more than 3.6 million trades over an 18-month period “for ERC-20 tokens, including tokens that are securities under the federal securities law,” according to the release, which went on to add:

“Almost all of the orders placed through EtherDelta’s platform were traded after the Commission issued its 2017 DAO Report, which concluded that certain digital assets, such as DAO tokens, were securities and that platforms that offered trading of these digital asset securities would be subject to the SEC’s requirement that exchanges register or operate pursuant to an exemption.”

The platform did not register as an exchange or file for an exemption, the SEC said.

The agency added that Coburn had already settled the charges. Though he did not admit to or deny the charges, the EtherDelta founder paid $300,000 in disgorgement, $13,000 in pre-judgement interest and a $75,000 penalty. The SEC noted that Coburn cooperated with the regulator, resulting in a lower penalty than may have otherwise been administered.

Meanwhile Robert Cohen reassured the public that the SEC is working hard to ensure that exchanges within the United States are compliant. However, he did not explain how they intend to handle decentralized exchanges that have anonymous creators. The intentions of the SEC are pure but the fact remains that the nature of exchanges based on blockchain technology make them practically impossible to shut down. When it comes to centralized servers, access can easily be revoked but the case isn’t the same for decentralized exchanges which are becoming increasingly popular.

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