Should Charges Against EtherDelta Founder Concern Crypto Developers?

Cryptoglobe recently reported on an announcement by the U.S. Securities and Exchange Commission (SEC) regarding the settlement of charges filed against Zachary Coburn, the founder of decentralized exchange EtherDelta. EtherDelta is a decentralized crypto exchange that provides a secondary market for Ethereum (ERC-20) tokens.

The SEC accused Coburn of running an unregistered national securities exchange by selling cryptocurrencies without filing the proper government paperwork. The SEC has stated that non-currency cryptoassets are securities and thus any crypto exchange selling such assets and offering its services to individuals within the United States must be registered with and under the regulation of the SEC, per the Securites Exchange Act of 1934.

Specifically, the SEC states that EtherDelta provided the infrastructure for the buying and selling of digital assets. The SEC even noted that EtherDelta’s services were baked right into the code because the "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 crux of the claim, however, relies on the fact that EtherDelta seemed to directly “disobey” the orders of the SEC.

The Commission notes that:

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.

In the end, Coburn did not admit guilt, but also chose not to fight the charges. Instead, the SEC wrote that he "consented to the order and agreed to pay $300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty." Further, the Commission states that if Coburn had fought, the penalty would have been much more harsh.

A Crossroads For Crypto?

What does this decision mean for innovators like Coburn who want to make the buying and selling of digital currencies and assets easier for the average person? More to the point, what does this ruling mean for those individuals who seek to develop decentralized technology?

Steven Peikin, Co-Director of the SEC's Enforcement Division remarkedL

We are witnessing a time of significant innovation in the securities markets with the use and application of distributed ledger technology.

However, the dispute is over who, if anyone, is in control of this still emerging technology. According to the SEC and Mr. Peikin, “this innovation necessitates the SEC's thoughtful oversight of digital markets and enforcement of existing laws."

Of course, if you are a crypto-enthusiast or proponent of decentralization you might be less inclined to share the view held by the SEC. A large portion of the crypto community profess a vision of a world where decentralization rules the day. A world without the need for central banking institutions or third parties to exchange value in a number of ways. Some of this crowd believes the philosophy of decentralization will not only help spread cryptocurrency around the world and remove the stranglehold of banks, but eventually, decentralize governance itself.

To these crypto-anarchists the struggle between regulation and standing up for decentralization is of utmost importance.

Others in the cryptospace see government regulation as inevitable or even beneficial. Ultimately, as long as the governments of the world are able to enforce their visions of how individuals should trade value, most people will comply for fear of suffering the consequences. Outside of the most purist programmers and developers, we are likely to see the vast majority of the crypto community comply with government edicts for the foreseeable future.

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BitMEX Slammed as Roubini Raises the Stakes in War Against Crypto

Neil Dennis

Every new concept has its critics and there's none so vehemently opposed to cryptocurrencies as New York University academic Nouriel Roubini, who has just taken his most vicious swipe yet at the emerging asset class.

In an essay entitled "The Great Crypto Heist", published this week on the website Project Syndicate, the NYU Stern Business School professor accuses financial regulators of "being asleep at the wheel" while an army of unregulated exchanges, propagandists and scammers commit "rampant fraud and abuse".

He singles out crypto-derivatives exchange BitMEX as being a particular threat to retail investors. Roubini clashed earlier this month with Arthur Hayes, the chief executive of BitMEX.

Regulation

But first, the professor explains why the sector needs to be more closely monitored. The broader financial sector came under increased regulatory scrutiny following the 2008 financial crisis, to protect investors and society. 

The regulatory regime does not capture cryptocurrencies, however, which are launched and traded outside the domain of official financial oversight, he says.

The result is that crypto land has become an unregulated casino, where unchecked criminality runs riot.

BitMEX

He rounds on BitMEX, registered in the Seychelles, which offers highly-leveraged bets on the rises and falls of cryptoassets: products more broadly known as derivatives.

These investment products have come under the microscope of regulators in many countries. The UK's Financial Conduct Authority would like to ban the sale of cryptoasset derivatives and exchange-traded notes to retail customers, saying they are too difficult to value and are prone to extreme price movements due to the volatile moves of the underlying cryptoassets.

Other global regulators have made moves to reduce the amount of leverage offered by crypto-derivatives exchanges. Roubini points out that with a 100-1 leverage, even a 1% price move in the underlying assets could trigger a margin call that wipes out the investor's entire account and leave them owing the exchange.

Hayes, boasted openly that the BitMEX business model involves peddling to 'degenerate gamblers' (meaning clueless retail investors) crypto derivatives with 100-to-one leverage.

BitMEX aslo runs a proprietary trading desk - an internal, for-profit desk that trades cryptocurrencies with its own money - that has been accused of front-running its own clients, Roubini asserts. He adds:

Hayes has denied this, but because BitMEX is totally unregulated, there are no independent audits of its accounts, and thus no way of knowing what happens behind the scenes.

Perhaps his most grand accusation in the essay, however, is that exchange is being used for criminal activity:

BitMEX insiders revealed to me that this exchange is also used daily for money laundering on a massive scale by terrorists and other criminals from Russia, Iran, and elsewhere; the exchange does nothing to stop this, as it profits from these transactions.

Tiff in Taipei

Roubini accused Hayes this month of holding back the broadcast of a video recorded of their clash at conference in Taipei - to which Hayes had secured exclusive right to.

In the essay, he continues this accusation, saying:

I suppose this is par for the course among crypto scammers, but it is ironic that someone who claims to represent the 'resistance' against censorship has become the father of all censors now that his con has been exposed.

Crypto Cancer Metastasized

In his final dig at the industry, Roubini says crypto trading has created a multi-billion dollar industry that does not just include the exchanges, but also "propagandists posing as journalists, opportunists talking up their own books and lobbyists seeking regulatory exemptions.

It is time global regulatory bodies stepped in, he concludes:

So far, regulators have been asleep at the wheel as the crypto cancer has metastasized. At a minimum, Hayes and all the others overseeing similar rackets from offshore safe havens should be investigated, before millions more retail investors get scammed into financial ruin.

So far, Hayes appears to have remained silent following the article's publication. No activity on his Twitter account. But the ball is now firmly in his court as the war of words heats up.