The November 8 SEC v. EtherDelta case stirred up the crypto community, as they will likely have to part with many of the illusions that the U.S. authorities are just “merely reflecting on the cryptocurrency phenomenon, but are in no way intent on imposing serious restrictions on it.” A recent statement by Asher Tan, the founder of an Australian cryptocurrency exchange CoinJar, that “in the U.S., blockchain projects are designed in such a way that they do not allow the American government to interfere in their activities” looks naïve in this case.
Indeed, the U.S. Securities and Exchange Commission, within the powers vested in it, reported on the establishment of administrative proceedings in relation to the EtherDelta trading platform, which positions itself as a decentralized platform.
Decentralization as a Means, Not as a Goal
It is possible to have a long discussion about how decentralized EtherDelta is, but one should agree with the head of Binance, Changpeng Zhao, who believes that decentralization is still not a goal, but a means that is designed to ensure the development of the underlying principles on which blockchain and cryptocurrency are based. In addition, while planning to open a decentralized platform as a plus to the centralized Binance, Zhao rightly notes that “100-percent decentralization cannot be achieved.” This is an important point because the SEC views EtherDelta as a decentralized platform, but if it were the same as the “obedient” Coinbase, this would not guarantee the absence of complaints from the regulator.
The SEC Explains Nothing and Blames
The SEC’s claims are not obvious, as the founder of the crypto exchange Zachary Coburn, who opened it three years ago, was not related to its operating activities, but the investigation was carried out against him. The regulator found out that a variety of ERC-20 tokens were traded on the platform, and the U.S. securities law was violated. The SEC did not clarify what tokens precisely it considered to be securities and whether the conclusions were confirmed by the successful completion of the Howey test, which is used as a “litmus test” to determine if a particular asset traded on the financial market is a security. After talking with SEC officials, Coburn, formally admitting no guilt, agreed to pay $300,000 in disgorgement, $13,000 in pre-judgment interest, and a $75,000 penalty. Total payments turned out to be almost 12 times higher than the average annual median wage in the American economy ($32,423), but it could have been higher if Coburn persisted.
The owner of the crypto exchange, which does not charge a commission for operations, sought to save his project, which continues to work. But what do the claims of the SEC mean? Given that there is case law in the United States, we will soon see dozens of such administrative cases.
IMF Fintech Advisor Marco Santori believes that it is essential to “read between the lines” of the charges against EtherDelta. He points out that the crypto exchange was sold to new owners, not U.S. citizens, and “huge” amounts for payment were issued to Coburn. He also asks a rhetorical question: “And how many of the 3.6 million transactions with tokens really violated American laws?” Santori points out that the official document does not give a single example of an illegal transaction.
In summary, Santori sees a significant risk that, with this approach, the SEC can close any cryptocurrency platform, and in the case of decentralized platforms, it is not at all clear what claims they may have since any restrictions on listing tokens are a step away from decentralization. The head of a crypto exchange Polybird, Harish Gupta, does not notice this when he speaks of the “Chinese wall” built in his organization, which opens up the possibility for users to trade only in cryptocurrency allowed in the country they are citizens of.
Decentralization Should Protect Developers
Speaking about the EtherDelta case, Washington lawyer Jake Chervinsky draws attention to the fact that the venue is “an excellent source of funds for ICO teams.” Besides, the regulator unexpectedly emphasized “a convenient user interface of the site.” Nonetheless, he expects even more such processes in relation to any of the crypto exchanges. “The SEC goes according to one scheme: let’s start first with a simple guy and his crypto exchange, and then eventually look at the large centralized sites, which, as we see it, are fine. Moreover, the regulator will strive to reach foreign crypto exchanges as well.” His colleague, Larry Cermak, agrees with him, arguing that the SEC will set itself such a task, but it will not be easy to fulfill it. Chervinsky also notes that decentralization protects software well, but not the developers who also need adequate protection.”
New York analyst Nathaniel Whittemore believes that such actions by the SEC will lead to the “more and more founders of decentralized trading platforms, like other cryptocurrency projects, preferring to remain anonymous.” A colleague of Whittemore, Katherine Wu, adds that her assessment of further developments is “not super positive.” She believes that all decentralized sites will need to receive the status of a brokerage company, that is, pass the appropriate licensing, following the SEC interpretation of U.S. law.
“The Simplest Conclusion” Drawn from the Situation with EtherDelta?
If Wu considers this unfair, then crypto enthusiast Anthony Pompliano, who in July became a partner of the investment company Morgan Creek Capital, insists that without compliance with the legislation on securities, cryptocurrency will not be able to “quickly develop and have a transformative effect.” His opinion is supported by lawyer Stephen Palley, who believes that one should not hide from the SEC if they trade securities and needs to follow all the instructions and that this is “the simplest conclusion of the situation with EtherDelta.”
Crypto analyst James Spediacci, on the contrary, says that one needs to see significant advantages for the security of cryptocurrencies that decentralized trading decisions have and that such platforms should be appreciated for not creating restrictions on launching and trading tokens. He believes that they should not in any way engage in the provision of custodial services, that is, the storage of private keys. Spediacci also suggests thinking about how to make such platforms “sustainable” in the face of such biased “harassment” by the state.
The Crackdown on Cryptocurrencies
Unfortunately, it now seems that the U.S. authorities have “launched an offensive” against cryptocurrencies. For example, the local Securities Commission in Colorado sent a “hello” to newly elected governor Jared Polis, a well-known supporter of cryptocurrency, announcing the forced termination of preparations for the launch of four ICOs because the agency had already seen securities in the unborn tokens. In Texas, colleagues of Colorado officials stopped the mining company AWS Mining PTY LTD, accusing it of “selling unregistered securities.”
What is happening in the United States has found a response from BaFin, Germany’s financial regulator which decided to “limit securities trading” by the British cryptocurrency organization Finatex Ltd., showing that Europeans, like the Americans, are ready to use the extraterritorial principle of law enforcement. The fact that strong states will use this principle in pursuing and striving to close decentralized crypto exchanges, wherever they are, is confirmed by computer security expert Bill Barhydt.
As a U.S. citizen, and arguing that decentralized solutions are becoming the basis for cryptocurrency banks that are replacing traditional lending solutions, he makes the reservation that such initiatives by American cryptocurrency teams will work in all countries of the world “except for those countries that are under action of the OFAC sanctions, a division of the U.S. Treasury.” This, the authorities will make it clear that such countries are where cryptocurrency freedom ends, which is determined by Washington’s political attitude toward other states.
Economic Degradation as a Consequence of a Departure from Decentralization
Be that as it may, it is evident that decentralized solutions on blockchain are what will exist as the Internet, which cannot be closed. An attempt to isolate oneself from it would mean a deepening of economic backwardness—something that people began to understand even in North Korea, which is gradually opening up the country to the “global web.” Attempts by the SEC to sabotage the activity of cryptocurrency platforms based on the non-public interpretation of U.S. securities laws create problems not only for these platforms but also for the American economy as a whole. Each of such SEC decisions, like the one with EtherDelta, is another incentive for an outflow of investments from the U.S. cryptocurrency industry into the other countries. These and other changes in the behavior of American regulators, such as the FCC which abandoned the principle of neutrality, threaten the idea that “everyone who has a computer and wants to create can have a chance to earn billions of dollars from their inventions,” as stated by one of the creators of Reddit, Alexis Ohanian.
Unfortunately, at the level of large international financial organizations, such as the IMF and the Bank for International Settlements, a repressive approach to new financial technologies also prevails. Hence the harsh comments of Robert Cohen, head of the new SEC cybersecurity unit, when he wants to emphasize that there is nothing special about decentralized approaches to asset trading, and most importantly, this is trading.
Such solutions do not look well thought out, just like a very controversial in terms of efficiency attempt to block the Telegram messenger in Russia. All participants in the cryptocurrency market need to look for common points so that, as a result, blockchain and cryptocurrencies can fully realize their potential, which allows, as one of the founders of Ethereum Joseph Lubin said, “to increase the level of welfare in society.” At the same time, the desire of the crypto community to “see the growth of the cryptocurrency market at any cost” should not lead to the loss of the primary meanings, for the sake of which blockchains and cryptocurrencies emerged in the first place, as John McAfee reminds us.