Solidus Digital Asset Trade Surveillance and Regulation Update

  • Solidus Labs
  • 11.12.18

Key developments from the past week, for digital asset practitioners thinking blockchain beyond the buzz.

This week: The SEC enforces — for the first time — against an unregulated digital asset exchange and releases its annual enforcement report; German authorities partially cease the operations of a UK-based crypto fund; And — digital asset-friendly governors elected in California and Colorado

Action and Data from the SEC

Last week, for the first time, the Securities and Exchange Commission exercised enforcement action against a digital asset platform for operating as an unregistered securities exchange. EtherDelta offered trading of various digital assets and failed to register or seek an exemption. This, despite the SEC’s July 2017 report asserting many digital assets are securities and therefore buy/sell platforms require exemption. The company’s founder, Zachary Coburn will pay a total close to $400,000 of fines and disgorgement fees. Here’s the official SEC statement.

SEC headquarters in Washington, DC

Supporting the “enforcement is coming, fast” sentiment, digital assets are prominently featured in the SEC’s second annual enforcement report. The document notes 12 enforcement actions brought against digital asset firms in 2018, and 225 ongoing investigations on cyber-related violations, which include digital assets. It also points out that while many cases pertain to fraud, the agency’s focus has been increasingly shifting to failure of satisfying compliance requirements — as in the case of EtherDelta. In total, the SEC alone ordered close to $400 billion in fines and disgorgement fees in 2018 (for all kinds of assets). According to another SEC record, the agency took action against digital asset violation on average once a month since June 2018.

German Banking Act Applied to Crypto

In a related event, indicating the push against unregulated digital asset activities is global, Germany’s Federal Financial Supervisory Authority(BaFin) partially shut down last week the German cross-border operations of UK-based firm FinaTex Ltd, which offered various digital asset products on its online trading platform “crypto-capitals.com.” The reasoning according to BaFin’s statement: “it does not hold the authorisation required under section 32 (1) of the KWG” — the German Banking Act. Three months ago, BaFin released an position statement on cryptoassets. Though in German only, Norbert Gehrke helpfully provided a summary in English.

Headquarters of Germany’s Federal Financial Supervisory Authority (BaFin)

Our Analysis

In the words of one legal expert quoted by Reuters, refering to the EtherDelta case: “This will likely be the first of many enforcement actions.” The enforcement action and new enforcement data underscores US regulators increasing crackdown on unregulated platforms, and the need for strong compliance infrastructure integration into digital asset trading workflows, including trade surveillance tailored for digital assets, licensing, regulatory reporting mechanisms and more. At the same time, it is worthwhile noting that most enforcement actions — as is the case with EtherDelta in the US and FinaTex in germany, do not order complete cessation of operations. Instead, the regulators seem to be focused on disciplining firms, indicating their interest in making the lack of compliance expensive, without stymying the digital asset space’s growth and innovation.

PS — the Midterms and the Crypto Space

In the week following the US midterm elections, digital asset enthusiasts can be pleased, seeing two pro-crypto politicians winning key gubernatorial position. Californians elected Gavin Newsom, who was the first US politician to accept political donations in bitcoin. In the state home to Silicon Valley, a governor mindful of digital assets and their possibilities can be a great sign for continued innovation. In Colorado, Governor-elect Jared Polis has formerly, while still a congressman, said he would do everything in his power against regulations that limit the development of digital assets. While in Congress, Polis advanced guidelines and regulations to provide the space with more legislative clarity.

Gavin Newsom, Governor Elect of California. 1st US Politician to accept Bitcoin donations

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Solidus Labs is a team of former Goldman Sachs engineers using 20 years of Wall Street experience to provide machine learning-powered trade surveillance tailored for cryptoassets. Our products help exchanges, broker dealers, market makers and other financial service providers detect and combat manipulation in digital asset trading, and streamline reg-reporting.

To learn more about our work check out www.soliduslabs.com or contact us at hello@soliduslabs.com. We’re always happy to start a conversation.

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