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SEC’s Crypto Enforcement

The SEC decision to indict EtherDelta founder Zachary Coburn for illegal trading of securities might have come across as a surprise to many in the crypto ecosystem, especially given that Zachary Coburn no longer owns the exchange. The regulatory stifling was somewhat palpable in the background when IDEX decided to block users from New York from trading. The crackdown on EtherDelta is in fact the SEC’s first enforcement action on a platform operated as an unregistered securities exchange. The response from the crypto community was along a spectrum and 0x also chimed in; While some welcomed the intervention of regulators, viewing it as a sign of much-needed regulation that the space needs, some others were dismayed by the fact that the SEC would start with so-called ‘non-custodial’ exchanges, which were hitherto considered to be somewhat immune to regulatory crackdowns as these marketplaces advertise themselves technically as ‘bulletin boards’ with order matching happening between end-users on a peer-to-peer basis. This is unlike traditional exchange platforms that have centralized custody and order books. The SEC basically took the view that if it walks and quacks like a duck, it is probably a duck. If the UI and the underlying functionality, in this case, facilitating the exchange of tokens, are similar to that of a national securities exchange, then the platform is treated as an exchange and therefore should be a registered entity.

The SEC’s overarching UI aspect definitely brings all the 0x-based relayers in to focus and makes them vulnerable to charges by the regulator. It will be interesting to see how other decentralized exchanges react to this news and realign their business models accordingly.

A few things worth pointing out –

  • The fine of $350,000 at the personal level is a pretty steep fine, even assuming the individual in question possibly made a few millions from the exchange operations, or as is more likely, from early investments in BTC/ETH etc
  • It does seem like there was not much protesting from the individual in question who just decided to accept the verdict and co-operate; This does seem like a ‘warm-up pitch’ by the SEC, a loosening of the limbs – get a quick win on an easy situation, get precedence sorted and now go selectively after some of the big fish.
  • This will probably lead to an acceleration in the process of increased clustering of exchanges and other emerging crypto businesses with a high regulatory exposure (pretty much 99% of them) in ‘crypto’ offshore havens such as Gibraltar and Malta, much like the traditional fund management industries’ penchant for places such as the Caymans, Channel Islands, Mauritius, Guernsey, Gibraltar etc
  • Cities like Dubai, Singapore and others might sense an opportunity as well, while traditional centres like NY, London etc will necessarily have to continue to be cautious

One thing is for sure, this is just the first turn of the regulatory screw, there is probably more where this came from. Fasten your seat belts.

Also, some folks wrote in, in response to yesterday’s post that touched upon the pollution in Delhi and pointed out the huge power consumed by the bitcoin blockchain and the ensuing environmental impact of POW mining. To be fair, the jury is still out there, and in defence of POW, the ‘net impact’, after accounting for all the processes involved in the fiat money life cycle that it can potentially replace, is clearly positive, and POW mining is arguably hastening research into better green energy sources.

Meanwhile in Crypto Wonderland….

“EtherDelta Founder is Facing Charges” Founder of the decentralized exchange EtherDelta – Zachary Coburn – was charged by the SEC over the illegal trades that EtherDelta facilitated as an unregulated securities exchange. EtherDelta is one of the first decentralized exchanges created to trade anonymously and in a non-custodial manner. The SEC alleges that the exchange had both the user interface and underlying functional that qualifies it as a national securities exchange and was thus required to register with the SEC. Zachary has reportedly agreed to pay the fines slapped on him by the SEC.

“Overstock CEO is bullish on Bitcoin Mass Adoption” Patrick Byrne, the CEO of Overstock, an Amazon-like marketplace which accepts payments in Bitcoin, said in a recent interview that he is still expecting cryptocurrencies to reach mass adoption. The Bitcoin bull highlighted the failure of the mainstream financial systems and how the people working under these systems have abandoned their hyperinflated currencies for decentralized assets like Bitcoin. However, Byrne didn’t comment on whether Bitcoin could be the champion of an ongoing race to coin supremacy, especially when there are plenty of speedier and technologically advanced cryptocurrencies around.

“No Trading Fees for USDC on Poloniex” In a bid to fight off competition from its rival GeminiUSD (GUSD), Circle-owned Poloniex is offering zero trading fees for USDC trades through the end of November. Poloniex already supports the controversial USDT stablecoin and nows provides trading services for the USDC/USDT pair. It is unclear whether Poloniex will list USDT indefinitely, but it has been on the exchange almost since its inception as Poloniex transformed from a major altcoin exchange to a major everything exchange.

“BTC Futures Volatility Hits All-time Low” Per Kevin Davitt, a senior instructor for The Options Institute at Cboe Global Markets, Bitcoin (XBT) futures, continue to trade a low volatility, especially in comparison to legacy capital markets, which continue to bounce up-and-down on the day-to-day. Bringing credence to his claim, Davitt then added that the average weekly [volatility] for XBT futures in the past month was approximately 6.6%, which is a far cry from the since-inception average of 15.65%. Although non-action may be seen as boring by many crypto savants, the Cboe Global Markets instructor added that the divergence between traditional assets, like stocks, and Bitcoin could be a “bigger story for industry onlookers”.

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