Has the SEC Thrown a Spanner in the Crypto Works?

The US Department of Justice has charged three men, including an ex-Coinbase employee, of insider trading in digital assets. What has thrown the crypto industry into something of a spin, however, is separate charges brought by the US Securities & Exchange Commission (SEC), which cite the digital assets as “securities”.

The industry is in the midst of a long-running struggle to obtain light touch regulation, widely seen as meaning crypto assets are not treated as securities, the outcome of the SEC case, therefore, will be of rather more importance to the industry than the criminal charges brought by the DoJ.

In what it says is the first insider case bought involving cryptocurrencies, the DoJ, alleges that Ishan Wahi, while working at Coinbase and directly involved in the process of listing new assets on the exchange, was part of a small group that was aware of upcoming listings and shared this information on at least 14 occasions with his brother Nikhil Wahi and a friend, Sameer Ramani. The latter two, using anonymous Ethereum blockchain wallets, bought tokens ahead of the public announcement from Coinbase, thus profiting from the information.

Coinbase launched an investigation into the allegations when they were first aired, and says once it had collected sufficient evidence to be confident in its suspicions, it provided information about these individuals to the DOJ and terminated Ishan Wahi.

Perhaps the bigger announcement, however, came from the SEC, which brought very similar charges against the three, alleging they made $1.1 million illegally. In a statement, Gurbir Grewel, SEC’s director of enforcement, says, “We are not concerned with labels, but rather the economic realities of an offering. In this case, those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase. Rest assured, we’ll continue to ensure a level playing field for investors, regardless of the label placed on the securities involved.”

In its own statement, Coinbase expresses concern about this development, noting, “The DOJ did not charge securities fraud. No assets listed on our platform are securities, and the SEC charges are an unfortunate distraction from today’s appropriate law enforcement action.”

The SEC’s action even dragged in the US Commodity Futures Trading Commission (CFTC) with commissioner Caroline Pham, who has previously argued that digital assets should be regulated by the CFTC, issuing her own statement on the case. Noting that the SEC’s case is a “striking example of regulation by enforcement”, she states, “The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together. 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.”

She adds, in what is perhaps a call for the CFTC to join the action against the accused, “Given the overriding public interest and the open questions on the legal statuses of various digital assets, such as certain utility tokens and DAO-related tokens, the CFTC should use all means available to fulfill its statutory mandate to vigorously enforce the law and uphold the Commodity Exchange Act.”

The case will be well worth watching, especially for those interested in how the regulatory cards will fall in the US. There have been calls for the CFTC and SEC to work together on crypto asset regulation, but thus far, the SEC in particular, seems keen to push ahead on its own. This probably means tougher regulation for the digital assets industry, more along the lines of equity and, of course, securities markets, rather than what was hoped for, a lighter touch, derivatives-style oversight function.