Crypto’s unlikely champion in its crusade against the SEC

SEC Chairman Gary Gensler Kevin Dietsch—Getty Images

As the battle between the crypto industry and Gary Gensler’s Securities and Exchange Commission escalates, the embattled sector has given its hopes of victory to an unexpected ally: Ishan Wahi, a former employee of crypto exchange Coinbase who pleaded guilty last month to what prosecutors described as a charge. as the first cryptocurrency insider trading case.

Wahi admitted to sharing confidential information from his employer with his brother and friend to make more than $1.5 million, and the crypto companies’ motivations do not include clearing his name of his two counts of wire fraud.

Instead, top firms such as Coinbase and VC firm Paradigm have sought to file “friend-of-the-court” briefs in a separate case by the SEC against Wahi, in which the agency is suing the ex-chief executive for insider trading in other cryptos. securities.

As Congress continues to debate the future of crypto legislation, this vacuum has left a key question for regulators: Which crypto assets are securities, and under the purview of the SEC, and which are commodities, and under the Commodity Futures Trading Commission?

Security vs. raw material

Under Gensler, the SEC has taken an aggressive approach to crypto, filing a series of enforcement actions and Wells notices, or formal notification of the conclusion of an investigation, against companies including Coinbase and Kraken. At the heart of these charges is the SEC’s belief that nearly every cryptocurrency is a security, and that certain firms operate as unregistered securities exchanges and broker-dealers.

The definition of a “security,” established by a 1946 Supreme Court case, determines whether a transaction is considered an “investment contract”—an investment of money in a joint venture with the expectation of profit from the efforts of others. Many in the crypto industry have maintained that most cryptocurrencies do not fall into this category, with Coinbase claiming that the more than 200 cryptocurrencies available on its platform are not securities.

As a manager at Coinbase, Wahi had early knowledge of which tokens Coinbase planned to list, and shared the information with his brother and friend to make trades before they were available and profit from the subsequent bump. In its case against Wahi, the SEC claims it has jurisdiction because the cryptocurrencies that Wahi and his associates were all securities, including AMP, DDX, XYO and RGT.

Wahi, represented by the law firm Jones Day, has sought to dismiss the case, arguing that all cryptocurrencies fail the Howey test and therefore fall outside the SEC’s jurisdiction. To do so, Wahi’s lawyers are relying on the “Major Questions” doctrine, a legal principle that argues that agencies like the SEC should not be able to interpret statutes concerned with major economic or political issues. Because Congress has yet to pass crypto legislation, their argument is that the SEC should not be allowed to decide the new question of how to define a crypto asset.

“The SEC cannot use the term ‘investment contract’ as a blank check to cash when it seeks to expand its regulatory scope,” Wahi’s lawyers wrote in their motion to dismiss. “And it cannot lay claim to the new and far-reaching digital resource industry without clear congressional authorization.”

Powerful allies

Although Gensler has repeatedly stated that almost every cryptocurrency, with the exception of Bitcoin, falls under the definition of a security, the SEC has yet to litigate the matter in court. Many in the crypto industry see Wahi’s civil case with the SEC — which is separate from his criminal case with the DOJ — as a means of challenging the agency’s interpretation.

Several groups have filed amicus briefs in support of Wahi against the SEC, including two crypto trade groups, the Digital Chamber of Commerce and the Blockchain Association. On March 22, Wahi’s former employer, Coinbase, also filed a request to file an amicus brief, and on Monday, the judge also granted Paradigm leave to file a card.

“Because the SEC’s allegations in this case depend on the agency’s erroneous assertion that Coinbase has listed digital assets that are securities, Coinbase has a unique and compelling interest in explaining why the SEC is misreading the securities laws,” the company’s lawyers wrote in their statement. to the court.

Wahi is currently awaiting sentencing in his criminal case, and the outcome of the SEC case will not affect the outcome. The The Wall Street Journal reported on Sunday that Coinbase was not funding its defense against the SEC, but his law firm would not share where the funding is coming from.