- Ex-Coinbase employee Ishan Wahi and others are accused of trading tokens before they were listed.
- The SEC said 9 of the tokens he traded were “securities,” which Coinbase immediately rejected.
- Companies can be fined for trading and dealing in securities without following SEC rules.
Insider traders might not be the only ones worried by Thursday’s news that a Coinbase employee was arrested for allegedly leaking information to his brother and a friend.
Federal prosecutors charged Coinbase product manager Ishan Wahi with fraud, saying he shared information about the Coinbase’s tokens before they were listed on the crypto exchange.
It’s one of the first crypto insider trading cases brought by US law enforcement. Yet, the industry appeared more concerned about a parallel civil case brought by the Securities and Exchange Commission because it asserted that nine of the tokens that Wahi and his co-defendants traded were “securities.”
That label, which the Department of Justice didn’t use in its case, could create serious problems for people and entities who enable crypto trading, lawyers said. The SEC can punish securities brokers and exchanges that don’t register and follow its rules.
It set off a series of criticisms, including from Jake Chervinsky, a lawyer and head of policy for the Blockchain Association and Caroline D. Pham with the Commodity Futures Trading Commission. Even Coinbase, which praised the prosecution of Wahi, wasn’t totally happy with the news.
—Jake Chervinsky (@jchervinsky) July 21, 2022
“No assets listed on our platform are securities, and the SEC charges are an unfortunate distraction from today’s appropriate law enforcement action,” Coinbase said in a blog post.
SEC Chair Gary Gensler and other regulators have been warning crypto market participants for years that many digital assets are securities and must be treated like stocks and bonds. In May, Gensler testified that Coinbase lists dozens of tokens that “may be securities,” and the SEC has proposed redefining an exchange to possibly include more digital asset trading platforms.
But token developers and digital asset exchanges often complain that the SEC’s guidance has been vague. While it has sued sellers of specific tokens, like Ripple Labs, which created the XRP token, hundreds or thousands of projects doing similar things haven’t gotten so much as a concerned letter from the agency. The regulator has issued extensive guidance and beefed up its crypto enforcement staff, but it generally doesn’t give its blessing to specific digital assets.
—Caroline D. Pham (@CarolineDPham) July 21, 2022
“I do believe what this [enforcement action] should say is that the SEC is looking closely at a wide variety of tokens,” said Joshua Ashley Klayman, a lawyer at Linklaters who advises clients in the crypto industry. “There’s a responsibility to ensure that digital assets on your platform are not securities.”
There is precedent for the SEC to go after crypto exchanges. It has taken action against at least one crypto company, Poloniex, accusing it of running an unregistered securities exchange. But the SEC’s order didn’t specify which of the digital assets Poloniex allowed users to trade were securities.
Poloniex, which sold its platform and is now a subsidiary of Circle Internet Financial Ltd., paid about $10 million to settle the case.