On November 11, 2018, the SEC charged EtherDelta, an online platform for secondary market trading of ERC20 tokens, with operating an unregistered national securities exchange. This order represents a significant step forward in the SEC’s enforcement efforts in the digital asset space as the agency’s first action against an entity operating as a securities exchange.

The SEC’s press release notes that “EtherDelta provided a marketplace for bringing together buyers and sellers for digital asset securities through the combined use of an order book, a website that displayed orders, and a ‘smart contract’ run on the Ethereum blockchain. EtherDelta's smart contract was coded to validate the order messages, confirm the terms and conditions of orders, execute paired orders, and direct the distributed ledger to be updated to reflect a trade.”  These are all attributes that are typical of nationally registered securities exchanges. Further, EtherDelta’s users executed over 3.6 million order in digital assets that are securities in an 18-month period after the SEC released its 2017 report on the DAO, which indicated that most, if not all, digital assets are securities.

As set forth in the EtherDelta order, the Securities Exchange Act of 1934 states that a “securities exchange” exists when an “an organization, association, or group of persons: (1) brings together the orders for securities of multiple buyers and sellers; and (2) uses established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of the trade.” The SEC concludes that based on EtherDelta’s exchange-like activities, that “[d]uring the Relevant Period, EtherDelta operated as a market place for bringing together the orders of multiple buyers and sellers in tokens that included securities as defined by Section 3(a)(10) of the Exchange Act.”

Though EtherDelta was charged for operating an unregistered national securities exchange, it could have registered as a broker-dealer authorized to operate an alternative trading system (“ATS”) under Regulation ATS, which is a significantly reduced regulatory burden. The SEC noted this fact in their order, perhaps as a signal to the industry to encourage compliance.