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BY CNA Team - November 9, 2018

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Security tokens under scrutiny

Enforcement action against EtherDelta shows that uncertainties still surround security token offerings
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The regulatory barriers to security tokens continue to exist, as the US Securities and Exchange Commission’s (SEC) enforcement action against EtherDelta’s founder Zachary Coburn, shows.

The charge, which has been settled between the securities regulator and Coburn, was for operating an unregistered national securities exchange, a first for the SEC, which previously brought enforcement actions against unregistered broker-dealers and unregistered ICOs, including some of the tokens traded on EtherDelta.

“EtherDelta had both the user interface and underlying functionality of an online national securities exchange and was required to register with the SEC or qualify for an exemption,” the regulator’s enforcement division codirector Stephanie Avakian says in a press release dated Nov 8.

EtherDelta, a crypto-to-crypto exchange, provides an online platform for secondary market trading of ERC-20 tokens, that is, tokens built off the Ethereum blockchain network.

The enforcement division’s other codirector, Steven Peikin, says that significant innovation in the securities market necessitates the regulator’s “thoughtful oversight of digital markets and enforcement of existing laws”.

While the US has been a leader in security token issuances, the latest SEC action will bring more uncertainty to the crypto markets that the country’s lawmakers in recent months have been trying to clarify, including for initial coin offerings (ICOs).

In particular, helping to list security tokens will become more problematic as platforms look for guidance from the SEC.

The top US platforms for security tokens are Polymath, Harbor, Securitize and Swarm. Coinbase and Circle are two startups that are also considering offering security tokens after acquiring broker-dealers.

Most of the more than 3.6 million orders placed through the EtherDelta platform were traded after the SEC’s issuance of the DAO report last year that concluded that certain digital tokens were securities.

This requires that platforms that offers trading in such securities to be registered or get an exemption, which EtherDelta did not do.

The SEC did not mention in the release which tokens it was referring to that were considered security tokens.

Image courtesy of EtherDelta website.

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