SEC Charges Digital Asset Trading Platform Founder for Operating Unregistered Exchange

On November 8, 2018, the Securities and Exchange Commission (SEC) accused the founder of a digital asset trading platform of failing to register as a national securities exchange.  Without admitting or denying the charges, the founder agreed to pay $300,000 in disgorgement and a $75,000 penalty, and to cease and desist from future violations of Section 5 of the Securities Exchange Act of 1934 (Exchange Act). 

The SEC said that the trading platform facilitated secondary market trading of ERC20 tokens, which are a type of digital asset issued and distributed on the Ethereum blockchain.  The platform provided a marketplace that matched buyers and sellers of digital assets through the use of its order book, using smart contracts to validate, confirm and execute orders.

The SEC alleges that over an 18-month period, the digital asset trading platform handled more than 3.6 million buy and sell orders for ERC20 tokens that were securities.  Further, approximately 92% of this trading took place after the SEC issued the DAO Report, in which the SEC warned that a platform trading digital asset securities and operating as an exchange must register with the SEC as a national securities exchange or be exempt from registration.   

The SEC found that the trading platform met the criteria of an “exchange” and traded in digital asset securities without registration or an exemption, thereby resulting in violations of the Exchange Act by the trading platform and its founder. 

To address confusion among market participants as to how and when a digital asset is a security, SEC Director of the Division of Corporation Finance William Hinman in a speech last week said the agency plans to issue “plain English” guidance on the matter. 

We will continue to monitor any additional SEC enforcement actions related to digital asset trading platforms, along with any further guidance from the agency on how and when a digital asset is a security.