SEC Charges EtherDelta Founder, Here is What it Could Mean For Crypto

The SEC has charged the EtherDelta founder With operating an unregistered exchange. He settled and EtherDelta is up and running. However, this confirms DEXs need to file with the SEC. SEE: SEC Charges EtherDelta Founder With Operating an Unregistered Exchange.^[1]

What does that mean (in my armchair opinion; I’m not a legal expert)?

It means anyone running a DEX that operates in the US, especially a DEX that mimics a traditional exchange like EtherDelta and/or allows ICO tokens to be traded, needs to file with the SEC to register as an exchange or request an exemption.

DEX exchanges are a tricky thing, and it is even more tricky when these deal with ICOs. After all, if ICOs might be / probably are securities, then some DEXs might be securities exchanges, and therefore in some cases a DEX that doesn’t get right with the SEC is actually an unregistered securities exchange dealing in unregistered securities (not a good look; sort of thing that is going to cost you $400k+ if we take the EtherDelta founder’s case as an example of what happens).

This isn’t the end of the world, EtherDelta didn’t get shut down, DEXs didn’t get banned, and it may be that DEXs that don’t mimic exchanges (and instead for example just host contracts that allow direct swaps) won’t have the same issues.

This is to say, truly decentralized exchanges that don’t mimic exchanges could still be safe (I don’t know, but I do think there is a difference between a direct swap via a contract and a whole exchange with an order book), but it is pretty clear that more DEXs should file with the SEC. Maybe getting right will mean following some basic Know Your Customer (KYC) rules, maybe it won’t, but it will at least mean avoiding large fines and SEC press releases.

The reality is we are in a confusing time to be running a crypto project in general, but especially one that touches ICOs. Crypto is generally being adopted and regulated, but with that comes some requirements and some unclear rules.

Thing is, for all the unclear rules, there is one clear rule… and that is found in the “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 moral of the story being, even if you operate a pure DEX, you should probably register or request an exemption.

NOTE: “The SEC has previously brought enforcement actions relating to unregistered broker-dealers and unregistered ICOs, including some of the tokens traded on EtherDelta.” This is a hint that operating an exchange that is trading tokens of ICOs which the SEC is already going after is a bad move.

What does this say about Ethereum or users? From what I understand there is no specific negative implications here for Ethereum, people who use tokens / DEXs, or DEXs that do file. This is about people running DEX exchanges not following rules laid out by the SEC. Ultimately a DEX is hosted on servers by humans and those humans can make choices like “which tokens to list or not list.” From that perspective they are running a type of exchange, and thus it is up to them to follow rules. This doesn’t have much to do with users or with the operating system the contracts or tokens run on (in this case Ethereum). Or at least that is my understanding. Like, we don’t blame Linux for malware or AT&T for spam phone calls.

1. SEC Charges EtherDelta Founder With Operating an Unregistered Exchange. CryptoCurrencyFacts.com.