exchange act

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Two recent proposals for bitcoin exchange-traded funds (“ETFs”) are vying to become the first to receive approval from the U.S. Securities and Exchange Commission (“SEC”) – one filed by CBOE BZX Exchange, Inc. (“CBOE”) and the other by NYSE Arca, Inc. (“NYSE Arca”). The SEC has yet to approve a cryptocurrency ETF, although several applications were filed throughout 2018.

A bitcoin ETF would allow investors to easily invest in bitcoin without needing to directly buy and manage the cryptocurrency themselves, potentially ushering in additional capital and enabling a wider range of institutional investors to tap into the market.

Once the proposals are published in the Federal Register, the SEC has an initial 45 days from the date of publication to issue a decision or request an extension, with total time not to exceed 240 days.

On February 20, 2019, the SEC announced that it settled charges against Gladius Network LLC (“Gladius”) for failing to register non-exempt offers and sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act. While the SEC has previously settled charges relating to unregistered ICOs, this is one of few occasions since its 2017 DAO Report that the SEC refrained from imposing civil monetary penalties for an ICO that it determined violated the registration requirements of the federal securities laws.

On November 8, the SEC announced that it settled charges against Zachary Coburn, founder of EtherDelta, a type of non-custodial digital asset trading platform commonly referred to as a “decentralized exchange” or “DEX.” Coburn was charged with causing EtherDelta to operate as an unregistered securities exchange in violation of Section 5 of the Securities Exchange Act of 1934 (the “Exchange Act”) during the period between July 12, 2016 (the date Coburn launched EtherDelta’s website) and December 15, 2017 (the date Coburn ceased collecting fees from EtherDelta users following its sale to foreign buyers).

The conclusions set forth in the SEC’s order contain several key components, including that, during the relevant period:

  1. EtherDelta operated as an “exchange” within the meaning of the Exchange Act;
  2. Coburn “caused” EtherDelta to violate the Exchange Act; and
  3. At least some of the digital assets bought and sold on EtherDelta were “securities.”

We analyze these findings in more depth below.