Edward W. Mandel
Dec 19, 2018

If the U. S. Securities and Exchange Commission busted you for illegal trading, what would it be worth to you to make it go away?

Remember that, if the SEC has you sighted, you’re probably big enough to pay a pretty hefty fine. For context, the regulator filed 754 enforcement actions in fiscal 2017. Those yielded almost $3.8 billion in penalties and disgorgements. That means the average money ordered by an SEC action is $5 million and change. So let’s assume that’s what the average subject of these enforcements is willing to and able to pay.

So it’s worth noting that the SEC has agreed to settle with Zachary Coburn, founder of ETH-oriented decentralized exchange EtherDelta, for a total $388,000.

Wait! Are we missing a digit? Was this even worth the commission’s time? Is this the same SEC that, in 2008, rang up Wall Street for $51 billion for the credit default swap hanky-panky which triggered the Great Recesion? Dang, just this past month it squeezed $20 million out of Elon Musk for tweeting while stoned.

Just a slap on the wrist. Credit: Idiomland.com

Kicking him when he’s down

I’m loath to speak ill of competitors. They pioneered my profession and, by studying their strategies and tactics, I have learned a great deal from each of them. Still, I’d be less than honest if I didn’t say that the BQT team has learned more from EtherDelta’s mistakes than from its achievements.

Zachary Coburn’s LinkedIn profile pic. Right profile not available

Coburn’s exchange was truly groundbreaking in its day, it appeared back when decentralized exchanges were just aborning. This was also the time when ether was still an “alt-coin,” defined as any cryptocurrency that wasn’t bitcoin. The Flippening was going to happen, and Vitalik Buterin was going to be the judo master to execute that flip.

It all looked really good on the whiteboard.

But a litany of unforced errors sank EtherDelta from prominence and, dare I say, from relevance.

There was the clumsy user interface. Then there was the hack. Hold on: dexes are supposed to be impossible to hack, right? Right, and yet EtherDelta managed it. All this came at a most unfortuitous time: February of this year, when the quote-unquote crypto bear market occurred. It had more to do with coins being bid up irrationally by overenthusiastic newbies who got what they had coming to them when the market corrected to more reasonable valuations, but that’s neither here nor there. EtherDelta got hit harder than most and was very soon eclipsed by IDEX as the dex preferred by ETH specialists.

EtherDelta’s trading volume is now something like $60,000/day, or roughly one-sixth of IDEX’s turnover.

So maybe $388,000 is about all the U. S. Treasury can reasonably expect to get out of Zachary Coburn.

Not that it’ll see a nickel of it.

SEC v. Math

Let’s break down that $388,000, shall we? The first $300,000 was disgorgement, which is “repayment of ill-gotten gains that is imposed on wrongdoers” according to some scold writing for Investopedia. (Seriously, should blackguards, cads and ne’er-do-wells expect an SEC crackdown?) This is comprised of civil judgments that just returns the money to private parties. The next $13,000 is interest which, like the disgorgement, goes to making individuals whole.

That leaves only $75,000 in actual penalties.

Does this even cover costs? Listen, I don’t know the burn rate for an SEC investigation, but this one ran 18 months, according to the press release, so if it’s more than $900 a week, Uncle Sam lost money while serving as collection agent for unnamed victims. The SEC’s annual budget is around $1.6 billion, which supports a workforce of around 4,500 — that’s around $1.1 billion of the cost — spread across a dozen physical offices — the remainder.

And I’m pretty sure it cost the SEC more than $900 just to write that press release. Figure it takes a fully burdened federal employee half a day to gather the data and write up a 500-word (plus or minus) piece. That’s probably $400 right there. Then there’s editorial review and rework — another $200. Then nothing gets posted without going through Legal. Yeah, we’re closing in on $900 pretty quick.

The press release also cites four SEC employees by name. Let’s assume the senior guy makes $200,000 — that’s what federal employees at the Senior Executive Service can expect to make in New York. Then let’s take a guess that the other three are making around $160,000 which is pretty much where federal paychecks top out there. Now let’s factor in the fully burdened rate — the proportion of labor costs that goes to benefits and professional expenses rather than cash payment — which, for a federal office in the union-friendly Northeast, would be roughly another 50%.

OK, I realize this is getting wonky so I won’t bore you with the rest of the math but, if this team spent more 4% of their combined time on this case, it was a money loser. And that number gets lower and lower when you consider the time of support staff and, as noted above, the ever-present Legal.

Why did they bother?

Ultimately Coburn gets to put the whole matter behind him as soon as his check clears. As part of the settlement, he doesn’t admit guilt to any securities law violation, or even validate the SEC’s findings. The commission goes so far as to recognize Coburn’s cooperation.

So that’s the first hint, isn’t it? It’s beyond my ability to be certain that he’s naming names, but it’s not beyond the range of reasoned speculation. It’s unclear who, if anyone, he could be incriminating or on what allegations, but I for one am glad that EtherDelta is not an exchange I’ve traded on, and that I’m not acquainted with its founder. For what it’s worth, Coburn himself is distancing himself from his creation; his LinkedIn profile suggests that he parted company with EtherDelta almost a year ago.

But before we get too paranoid, let’s be clear about how the SEC is spinning it. After all, I might be the first one to blog about how this investigation was a monumental waste of the regulator’s time, but I’m sure someone on staff at the House Financial Services Committee — which oversees the agency— must’ve pointed it out to some member of Congress by now.

Although, the commission has taken at least 23 actions against ICOs prior to going after EtherDelta — and two in the days since the November 8 settlement — “This is the SEC’s first enforcement action based on findings that such a platform operated as an unregistered national securities exchange,” according to the press release.

So does this represent a new focus on exchanges rather than issuers?

Not necessarily.

It’s telling that the crypto-oriented news sites have done little with this story beside dutifully rewrite what the SEC announced. You can’t really fault them — they don’t have a lot of experience yet reporting on regulators.

Reuters, though, is another breed of cat.

“This is a significant action by the SEC because it is the first enforcement action again an illegally operating exchange,” Reuters quoted Dina Ellis Rochkind of the New York law firm Paul Hastings as saying. “If you are trading securities — which most ICOs are — they must be traded on a registered Alternative Trading System or National Exchange. This will likely be the first of many enforcement actions.”

So that’s an opinion, and a considered one, but it is only one opinion.

I’d hasten to add it’s the opinion of someone who’s selling compliance services.

Frankly, I think this whole mess is a one-off. Sure, it sets a precedent, but a fairly toothless one: “Pay back what we can prove you shouldn’t have accepted in the first place, and we’ll slap you lightly on the wrist. You won’t go broke and you won’t do time. You don’t even have to admit wrongdoing.”

Sure, this is on my radar but, considering that BQT.IO has no aspiration to accept any funds from US citizens or residents, I’m not too concerned personally. Of course United States is one of the markets we cannot ignore but will enter it with proper registrations... meanwhile we will domicile on our European-bred exchange and enter Asia markets... I’m confident we’re on pretty safe ground.

Edward is an Ernst and Young Entrepreneur of the Year Finalist, Blockchain Enthusiast and visionary behind many successful organizations. An avid entrepreneur, Edward has a knack for designing distinctive business models complemented with superior technology to deliver unparalleled service and profitability. Edward also has been advising and consulting for various successful Blockchain technology and ICO projects and recently launched his own BQT.IO P2P exchange helping traders connect with each other to leverage their crypto assets.

BQT.IO has been in development since March 2017 and its ICO launched September 18. The information can be found online at BQT. IO. IO. io and on Twitter as @BQT.IO_ico.