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Risk Fraud & Compliance

US charges ex-Coinbase manager in first crypto insider trading case, regulatory turf battle likely

Todd Ehret  Senior Regulatory Intelligence Expert

· 5 minute read

Todd Ehret  Senior Regulatory Intelligence Expert

· 5 minute read

The SEC's first-ever insider trading case involving cryptocurrencies underscores the agencies desire to establish its jurisdiction in this area

US securities authorities recently announced charges against a manager at top cryptocurrency exchange Coinbase Global and two of his associates, in the first federal case alleging insider trading in virtual currencies. The case also underscored the Securities and Exchange Commission’s (SEC’s) determination to assert jurisdiction over cryptocurrencies and other digital assets that it considers to be securities and signaled a potential dispute among regulators over the agency’s reach.

The SEC and the Department of Justice (DOJ) filed civil and criminal charges against Ishan Wahi, a product manager at Coinbase, his brother, Nikhil Wahi, and their friend, Sameer Ramani. The charges allege that Ishan Wahi shared confidential information about pending announcements of new crypto assets that Coinbase would allow users to trade through its exchange with his brother and Ramani.

Nikhil Wahi and Ramani allegedly purchased and sold at least 25 crypto assets for a profit of more than $1.1 million using Ethereum blockchain wallets at least 14 times before Coinbase announcements from June 2021 until April 2022, according to the charges.

The case comes just weeks aft r the DOJ brought insider-trading charges against an employee of Opensea, a marketplace for non-fungible tokens (NFTs). Similar to cryptocurrencies, NFTs are based on blockchain technology that is rapidly disrupting the financial sector and drawing calls for greater regulatory oversight.

For more on the regulation of cryptocurrencies, access the full digital version of the Cryptos on the Rise 2022 report here

The SEC said that at least nine of the crypto-assets involved “were securities,” an assertion which caught the attention of many attorneys, crypto legal experts, proponents, and former and current commissioners of the Commodity Futures Trading Commission (CFTC), who said the case could have broad implications.

In  announcing the SEC case, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said: “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.”

Damian Williams, the US Attorney in Manhattan, said in a statement: “Fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street.”

The DOJ said the Wahi brothers were arrested in Seattle, while Ramani remains at large. Prosecutors also said Ishan Wahi had bought a one-way plane ticket to India after a Coinbase security director summoned him to the company’s Seattle office for a meeting. Law enforcement barred him from boarding the May 16 flight, prosecutors said.

Coinbase response

An SEC official said its investigation was continuing and declined to say whether it would act against Coinbase itself for listing the tokens which it deemed securities in the complaint. “Coinbase treated such information as confidential and warned its employees not to trade on the basis of, or tip others with, that information,” the SEC stated.

Coinbase had shared findings with prosecutors from an internal investigation into the trading, explained the company’s chief security officer, Philip Martin. “We are committed to doing our part to ensure that all market participants have access to the same information,” Martin wrote on Twitter.

Paul Grewal, chief legal officer at Coinbase, disputed the SEC’s assertion that the instruments involved were securities. “Coinbase doesn’t list securities. Period,” Grewal wrote on Twitter. “We have cooperated with both the DOJ and the SEC on this investigation,” Grewal said. “The DOJ reviewed the same facts and chose not to file securities fraud charges against those involved.” (Coinbase CLO Grewal does not appear to be related to the SEC’s Grewal.)

Andrew St. Laurent, a lawyer for Ishan Wahi, declined to comment. A lawyer for Nikhil Wahi did not immediately respond to requests for comment. A lawyer for Ramani could not be identified.

“Regulation by enforcement” and a potential turf war

In a rare criticism of another federal regulatory agency, CFTC Commissioner Caroline Pham released a statement suggesting the SEC was setting policy “in the dark” and without accountability. “The case SEC v. Wahi is a striking example of ‘regulation by enforcement,'” Pham said. “The SEC complaint alleges that dozens of digital assets, including those that could be described as utility tokens and/or certain tokens relating to decentralized autonomous organizations (DAOs), are securities.”

She said the case could have “broad implications” and underscored it was critical for regulators to 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,” she said. “Regulatory clarity comes from being out in the open, not in the dark.”

The CFTC has made its own assertions over the nature of cryptocurrencies, calling them commodities and thus, subject to its own jurisdiction. A federal jury decision in Boston in late-July demonstrated legal support for that view. The founder of a defunct cryptocurrency business was convicted of fraud over false claims that its virtual currency was backed by $300 million in gold. The jury found Randall Crater, 51, guilty of committing wire fraud and making unlawful monetary transactions. The CFTC’s lawsuit against Crater and his failed company, Nevada-based My Big Coin Inc., had led to one of the first court rulings holding that a virtual currency could be considered a commodity within the CFTC’s jurisdiction.

Former CFTC Commissioner Brian Quintenz sided with Pham in voicing his concerns over the SEC’s Wahi case: “Regulation by enforcement, threats, leverage, PR, or any other means beyond the APA (Administrative Procedure Act) rulemaking process is wholly inappropriate,” Quintenz said on Twitter.