First, ICOs, and now, DEXs. The SEC just loves killing off our favorite three-letter crypto dreams. WTF?

The U.S. Securities and Enforcement Commission announced on Thursday that it had settled charges against Zachary Coburn, founder of decentralized exchange EtherDelta. As the name implies, EtherDelta specializes in trading Ethereum-based (ERC20) tokens—the same kind of tokens sold during ICOs that the SEC has said over and over again are almost entirely unregistered securities.

https://twitter.com/APompliano/status/1060560694095962112
AD

Neither admitting nor denying the charges, Coburn consented to the SEC’s order to pay nearly $400,000 in assorted fines, according to the agency’s press release. Typical of SEC settlements in the recent past, Coburn’s cooperation is noted as the reason he did not face a stiffer penalty. The agency also indicated that this the “first enforcement action” against a platform found to be operating an “unregistered national securities exchange.” It sure sounds like more are coming.

https://twitter.com/Melt_Dem/status/1060565926926442496

While some may dismiss the relatively light penalties as a slap on the wrist—given EtherDelta’s trading volume listed in the SEC's complaintJuan Llanos, a cryptocurrency compliance expert and advisor, says the SEC’s actions are far from inconsequential. The enforcement is another sign, he says, that U.S. regulators will continue to look for ways to claim jurisdiction, “regardless of what technology is used." As a result, not only will EtherDelta be forced to completely restructure its business, but every other decentralized exchange must adapt to the new order as well. But given the current regulatory climate, with an SEC determined to strike down upon ICOs and their tokens with great vengeance and furious anger, how could anyone not have seen this coming?

It was all fairly foreseeable, says Matteo Leibowitz, a cryptocurrency researcher and investor. In fact, in his most recent edition of the CryptoChat newsletter published last Monday, Leibowitz predicted DEX operators would “in all likelihood” soon be forced to contend with SEC guidelines regarding unregistered securities or risk facing prosecution. Leibowitz tells Decrypt that it’s a situation that has been brewing since the SEC’s DAO report in 2017 first introduced the idea of tokens as securities.

“[It’s] hard to imagine that [DEX operators] weren't aware of the implications, but perhaps they thought there would be safety in numbers, especially as centralized exchanges like Kraken, Poloniex, Bittrex, etc.—which all see significant volume—were similarly listing these grey area assets.” The SEC evidently sees no grey area—merely the same black and white securities laws that have been applied for decades—and maybe a little green, for all the fines its been stacking up recently.

As for EtherDelta’s future, Leibowitz’s says it’s hard to tell, since it has “largely fallen off the map” ever since Coburn sold the decentralized exchange to foreign buyers in late 2017. (EtherDelta did not respond for comment.) But the effects on the rest of the DEX field are clear: “Logistically, it comes down to implementing [know-your-customer] procedures and delisting any token with security-like properties,” he says. In practice, however, this has “detrimental implications for the DEX business model, which largely relies on providing liquidity for the more grey area assets” and KYC-free trading. It is then “very unlikely,” he says, that most DEXs will remain competitive against their centralized counterparts.

But the writing’s been on the wall for some time. Last September, ShapeShift and its CEO Erik Voorhees earned the ire of the crypto community for “preemptively” introducing KYC rules on its peer-to-peer exchange in an attempt to stave off zealous regulators. And just last week, IDEX became the first high-profile decentralized exchange to do the same. It’s a slap in the face to anonymous decentralization diehards everywhere, but what’s the alternative?

AD

Leibowitz says it may still be possible for “truly” decentralized, censorship-resistant exchanges to exist, and points to UniSwap, Bancor, and Slow.Trade as potential contenders. This would entail, however, all order matching and execution operations being managed by a smart contract, he says. Other things he says a decentralized exchange would have to do include: any “upgrades to protocols” being controlled by a Decentralized Autonomous Organization (DAO); avoiding keeping an order book on a centralized server (EtherDelta’s fatal flaw); finding a way around centralized web hosting and domain registration; and asking your users to deal with the “high latency” and “susceptibility to miner front-running” that results as a consequence.

In other words, you’re going to have to try much, much harder to fight the law just to trade a few shitcoins now and again. Cue up The Clash.

Read Next: SEC puts the kibosh on Blockvest's ICO

Stay on top of crypto news, get daily updates in your inbox.