The tokenized asset that is a security, and what follows

Graduate · enrolled learners

This lesson opens with EtherDelta, 2018.

What happened

EtherDelta was a platform for trading tokens on-chain, an early decentralized exchange, and it matched buyers and sellers of many tokens, some of which were securities. It ran on a smart contract its founder, Zachary Coburn, wrote and deployed, with a website that displayed the order book, and it was never registered as an exchange: from July 2016 to December 2017 its users executed more than 3.6 million orders. In 2018 the Securities and Exchange Commission found that EtherDelta's founder had caused it to operate as an unregistered national securities exchange, because a platform that provides a marketplace bringing together buyers and sellers of securities is a securities exchange and must register as one or operate under an exemption. The founder settled without admitting or denying the findings, paying 300,000 dollars in disgorgement, 13,000 dollars in interest and a 75,000 dollar penalty, about 388,000 dollars in all. The SEC called it its first enforcement action based on findings that such a platform operated as an unregistered national securities exchange, and its point is broader than one platform: when the thing being traded is a security, the securities regime does not stop at the issuer, it reaches the venue that lists it, the broker that intermediates it, the party that holds it. EtherDelta is the case that shows the second half of the securities question, that a yes for the token is a yes for the market around it.

The decision point

If a token is a security, the securities regime applies not only to the issuer that created it but to the entire market that trades it: the venue that provides the marketplace is a securities exchange and must register or be exempt, the party that intermediates trades is acting as a broker, the party that holds the token for others is a custodian, and the records of who owns it are a transfer-agent function. This is what follows from a yes to the securities question, and it is the half issuers most often forget: they analyze whether their own offering is a security and stop, when the same determination regulates the exchange, the broker and the custodian around the token. EtherDelta is the case, an operator charged for running an unregistered securities exchange simply for providing a marketplace for tokens that were securities. So the decision when a tokenized asset is a security is to map the whole regulated perimeter it creates, not just the issuance: which venues may list it, who may intermediate it, who may custody it, how ownership is recorded, because each of those is a regulated function once the token is a security, and building the market around a security token as though only the issuer is regulated leaves the venue, the broker and the custodian exposed exactly as EtherDelta's operator was.

Recorded loss

$388,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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