The SEC claimed today in a new lawsuit that at least nine digital assets listed on the cryptocurrency exchange Coinbase are unregistered securities.
The nine assets in question are AMP (AMP), Rally (RLY), DerivaDEX (DDX), XYO (XYO), Rari Governance Token (RGT), LCX (LCX), Powerledger (POWR), DFX Finance (DFX) and Kromatika ( CHROME).
“A digital token or crypto-asset is a security for crypto-assets 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 joint venture, with a reasonable expectation of profit derived from the efforts of others,” the SEC wrote in a complaint filed today against a former Coinbase employee accused of insider trading.
The SEC and the Department of Justice today announced charges against former Coinbase product manager Ishan Wahi and two others, accusing them of running an insider trading scheme that earned them more than $1.1 million in illegal profits. Wahi allegedly tipped off his brother Nikhil Wahi and his friend, Sameer Ramani, about upcoming token listing announcements on the crypto exchange.
“Prior to these announcements, which typically resulted in an increase in the assets’ prices, Nikhil Wahi and Ramani allegedly purchased at least 25 cryptoassets, of which at least nine were securities, and then typically sold them shortly after the announcements for a profit,” the SEC said in a press release.
The commission said the nine tokens contain “the hallmarks of the definition of a security,” including ongoing representations by issuers and their management teams regarding the investment value of the tokens, the management efforts that contribute to the tokens’ value, and the availability of the secondary markets for trading the tokens.
“Therefore, at all times relevant to the conduct alleged in this complaint, a prudent investor in the nine cryptoasset 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,” the SEC said .
In a blog post published on Thursday, Coinbase said the company had filed a petition with the SEC to improve “regulations for securities in digital assets.”
“Our petition urges the SEC to develop a workable regulatory framework for digital asset securities governed by formal procedures and a public notice and comment process, rather than through arbitrary enforcement or guidance developed behind closed doors,” the company said.
Meanwhile, Kromatika Finance, the Ethereum-based DEX aggregator behind the KROM token, responded today to the SEC’s allegations of insider trading at Coinbase and the commission’s inclusion of the KROM token on the exchange’s list of unregistered securities.
“It has been brought to our attention that our token $Krom is mentioned in an insider trading complaint,” Kromatika tweeted. “This complaint is against an employee of Coinbase. We, Kromatika Finance, are not involved in this matter, nor are our employees.”
According to Kromatika, the team was not consulted by Coinbase for a potential listing. “We are also confident that Coinbase will assist the authorities in clarifying the situation regarding the error committed by this isolated individual.”
The SEC has so far had a complicated, but mostly hostile, relationship with the crypto industry.
Since 2018, the commission has regulated crypto through enforcement actions, targeting startups that raised money through initial coin offerings (ICOs). The SEC has taken the position that almost all Ethereum-based tokens sold in an ICO are an unregistered security, and the commission is currently embroiled in a $1.3 billion lawsuit against the crypto-payments firm Ripple over own sales of XRP.
While the SEC has previously, through public statements by former officials, said it does not consider both Bitcoin (BTC) and Ethereum (ETH) to be securities, current chairman Gary Gensler has been less forthcoming. Last month he told CNBC he just wanted to say for sure that Bitcoin is not a security while sidestepping questions about Ethereum.
It is currently unclear whether the SEC plans to pursue charges against Coinbase for listing nine, and potentially more, unregistered securities, although the commission threatened the crypto exchange with a lawsuit last year that resulted in the company dropping the interest-earning loan product. .
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