On November 8, the SEC settled charges against Zachary Coburn, the founder of EtherDelta, a digital token trading platform.  This is the SEC’s first enforcement action against an entity for operating as an unregulated national securities exchange.  Mr. Coburn consented to the SEC’s order and agreed to pay $300,000 in disgorgement, $13,000 in prejudgment interest, and a $75,000 penalty.

In its order, the SEC concluded that EtherDelta’s trading system met the definition of “exchange” under the Securities Exchange Act of 1934.  In this regard, the SEC stated that EtherDelta operated as a market place for bringing together the orders of multiple buyers and sellers in tokens that included securities.  Regarding whether the tokens were securities, the SEC said that the purchasers of digital tokens invested money with a reasonable expectation of profits, including through the increased value of their investments in secondary trading, based on the managerial efforts of others.  These factors are key elements of the test laid down in SEC v. W.J. Howey Co. as to whether an investment qualifies as a security, and thus whether the SEC has jurisdiction over transactions involving them.

These findings are not new.  The SEC has made it clear for some time that it is willing to treat digital tokens as securities.  In 2017, the SEC issued its Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO in which the Commission said that tokens will be considered securities if their issuance meets the longstanding definition of investment contracts under the Howey test.

Further, the SEC has been aware of the problems with online platforms effectively acting as unlawful exchanges.  In March this year the SEC issued a public statement that online platforms must register as a national securities exchange or qualify as an exempt alternative trading system (“ATS”).  In its order against Coburn, the SEC makes explicit that EtherDelta failed both of these requirements.

EtherDelta is not the first or only online cryptocurrency trading platform that has been taking advantage of the lack of enforcement by the SEC.  The hype surrounding digital tokens has prompted the creation of numerous sites for regular people to get in on the action.  The risk was so great that it prompted the SEC to create a website advertising the sale of a fake digital token, the HoweyCoin.

Actions to take

Many legitimate companies have put off regulatory compliance because the trading of digital tokens was well within the gray area of the law.  The action against EtherDelta, as well as the increasingly public position of the SEC, shows that ignorance is no longer a viable strategy (for those who might have believed that it once was).  Entities operating as online trading platforms are on notice that the SEC’s rules and laws concerning securities exchanges could apply to their operations.

For entities looking to avoid an enforcement action, the SEC has been upfront about allowing avenues for legitimate operations.  The clearest avenue is the expansion of the ATS exemption to cover digital token trading platforms.  Entities trading digital tokens would be well advised to begin taking steps to meet this exemption.

Otherwise, expect more from the SEC.  The Commission has been slowly, but surely, setting out its position regarding the various legal aspects of digital tokens and trading platforms.


Ansley is a derivatives attorney in the Firm’s Global Derivatives and Hedge Fund practice. She regularly advises clients on a broad array of regulatory, transactional and enforcement matters involving the financial markets and financial products. Prior to joining Baker McKenzie, Ansley served in the general counsel department of the National Futures Association, where she advised on regulatory matters related to futures, forex and swaps, including provisional registration reviews of US and non-US swap dealers.