The U.S. Department of Justice unsealed charges Thursday against a former Coinbase employee in Seattle, his brother, and a friend, alleging that they used his inside knowledge of the cryptocurrency exchange’s upcoming listings to make $1.5 million in profits on carefully timed and concealed trades.
Damian Williams, the U.S. attorney for the Southern District of New York, described the indictment against former Coinbase product manager Ishan Wahi, his brother Nikhil Wahi, and friend Sameer Ramani, as the “first ever insider trading case involving cryptocurrency markets.”
But the bigger stir in the cryptocurrency world is coming from a companion lawsuit against the trio, filed by the Securities and Exchange Commission in U.S. District Court in Seattle on Thursday.
The SEC suit asserts that at least nine of the crypto assets involved in the alleged insider trading qualified as “crypto asset securities.” By putting the label of securities on tokens that many in the cryptocurrency world assert are commodities, the SEC is pushing to subject crypto assets to a new level of federal regulation and scrutiny.
The SEC’s suit is “a striking example of ‘regulation by enforcement,’ ” wrote Caroline D. Pham, commissioner with the Commodity Futures Trading Commission, in a statement released Thursday.
“The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together,” Pham added. “Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input—through notice-and-comment rulemaking pursuant to the Administrative Procedure Act. Regulatory clarity comes from being out in the open, not in the dark.”
The SEC makes its case for the “security” definition in its suit: “A digital token or crypto asset is a crypto asset security if it meets the definition of a security, which the Securities Act defines to include ‘investment contract,’ i.e., if it constitutes an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”
Another portion of the complaint elaborates on the argument:
[E]ach of the nine companies that offered these crypto asset securities and their promoters further emphasized, among other things, their efforts to get their crypto asset securities listed on secondary trading platforms, and the critical role that executives and others at the company played in turning the company into a success, thereby increasing the value of the crypto asset security. In other words, each of the nine companies invited people to invest on the promise that it would expend future efforts to improve the value of their investment.
These hallmarks of the definition of a security continue to be true for the nine crypto asset securities that are the subject of the trading in this complaint, including continuing representations by issuers and their management teams regarding the investment value of the tokens, the managerial efforts that contribute to the tokens’ value, and the availability of secondary markets for trading the tokens. Thus, at all times relevant to the conduct alleged in this complaint, a reasonable investor in the nine crypto asset securities would continue to look to the efforts of the issuer and its promoters, including their future efforts, to increase the value of their investment.
Paul Grewal, Coinbase chief legal officer, challenged that stance in a post titled, “Coinbase does not list securities. End of story.”
He wrote, “The SEC’s charges put a spotlight on an important problem: the US doesn’t have a clear or workable regulatory framework for digital asset securities. And instead of crafting tailored rules in an inclusive and transparent way, the SEC is relying on these types of one-off enforcement actions to try to bring all digital assets into its jurisdiction, even those assets that are not securities.”
Coinbase separately petitioned the SEC to clarify the rules, writing in part:
Digital assets that trade today overwhelmingly have the characteristics of commodities. Coinbase, like many other exchanges, has intentionally and conscientiously steered well clear of securities to ensure that we are able to operate in full compliance with applicable laws and regulations. However, new rules facilitating the use of digital asset securities would allow for a more efficient and effective allocation of capital in financial markets and create new opportunities for investors.
Prosecutors say Coinbase cooperated with the FBI’s investigation into its former employee, Ishan Wahi, 32, and his two alleged co-conspirators. Wahi is charged with two counts of wire fraud conspiracy and two counts of wire fraud. Each count carries a maximum sentence of 20 years in prison.
Here’s the full text of the SEC’s suit.
Securities and Exchange Commission v. Wahi (2:22-cv-01009) by Todd Bishop on Scribd
