Entities working on the decentralized side of cryptoasset trading are already starting to fall into line, it seems, after the US Securities and Exchange Commission’s (SEC) recent action against EtherDelta (ED) creator Zachary Coburn, who was charged with operating an unregistered securities exchange and forced to pay nearly $400,000 in disgorgement and fines.
In the wake of this announcement, OpenRelay founder Austin Roberts, whose company develops and operates the 0x-powered OpenRelay order book software suite, has issued a statement broadcasting his and the company’s adherence to the SEC’s strictures.
OpenRelay will implement changes to both its software application programming interface (API) and “operational process” to this end. Users of OpenRelay’s trading software will have to sign updated terms of service with their private key, presumably avowing not to trade any token resembling a security (the finalized terms are forthcoming). The company will also pare a curated list of tokens that can be traded using its webpage widget, to “only include tokens that have been evaluated from a securities perspective.”
Furthermore, a “blacklist” capability will be coded into its software to allow the company some discretion regarding which tokens can be traded by its users. While tokens will still not have to be pre-vetted to trade using OpenRelay’s API, the new ability will allow the company to visibly respond to any new directions the SEC takes with respect to specific tokens or classes of tokens.
Devs Washing Their Hands
Roberts emphasized in his blog post that OpenRelay’s own software was open-source software, built upon more open-source software (the Ethereum-based 0x protocol). Therefore, although they will implement the SEC-friendly measures on their own instance of OpenRelay - the one they themselves developed - Roberts was keen to disclude OpenRelay’s culpability in whatever other users and developers may do with their forks of the software.
The constraints we are imposing will be implemented in our open source projects, but will be applied primarily through our hosted services. If someone chose to host their own instance of the OpenRelay services, we cannot constrain the tokens they allow on their platform [...] We cannot control whether third parties running our software include the same set of [curated] tokens, but they should be aware of the legal ramifications.
It is not clear at this juncture whether or not this sort of distancing will prove effective in avoiding future legal trouble. After all, in what is now the primary example of the SEC’s interaction with decentralized exchanges, at least part of Coburn’s crime seems to be that he coded up a platform that functioned properly (the other part being rather more obvious, that ED did not register with the SEC).
Drew Hinkes, New York University adjunct law professor and General Counsel at Athena Blockchain, outlined this issue nicely. Speaking of ED's Zachary Coburn:
but what's more important? That he wrote the code? deployed it? controlled it post-deployment? Not clear. But it is clear that the functionality being conducted by nodes didn't absolve him of responsibility. Massive implications for "decentralized systems" as regulatory arbitrage— Drew Hinkes (@propelforward) November 8, 2018