The SEC is taking a long-feared position on Coinbase insider trading
A former product manager at Coinbase has been arrested, the US Department of Justice announced Thursday, after being charged in a cryptocurrency insider trading scheme related to the listing of new crypto tokens on the Coinbase exchange. A separate filing of the case by the SEC signals the beginning of a major battle with crypto firms over what should be designated as a security.
A press release described that former Coinbase employee Ishan Wahi and his brother Nikhil Wahi had both been arrested while their friend Sameer Ramani had been charged but had not been located. Ishan Wahi has been charged with two counts of wire fraud conspiracy and two counts of wire fraud, while Nikhil Wahi and Sameer Ramani were both charged with one count of wire fraud conspiracy and one count of wire fraud.
Although the DOJ’s charges do not include any counts of securities fraud, interestingly, in separate charges filed by the SEC, a number of the assets traded by the group are designated as crypto-asset securities, a classification that is sure to have far-reaching implications for the crypto industry if it holds.
Specifically, the SEC framed the following assets as securities: Power Ledger’s POWR token, Flexa’s AMP token, Rally’s RLY token, DerivaDEX’s DDX token, XY Labs’ XYO token, Rari Capital’s RGT token, Liechtenstein Cryptoassets Exchange’s LCX token, DFX to Finance and Kromatika Finance’s KROM token.
In a 62-page filing, the SEC takes particular aim at the firms and tokens listed, saying that “Nikhil and Ramani traded securities subject to the federal securities laws because these cryptoassets were investment contracts; they were offered and sold to investors who made an investment of money in a joint enterprise, with a reasonable expectation of profit to be derived from the efforts of others.”
The SEC increasingly classifying crypto assets as securities could be a major threat to the crypto industry, which has gained momentum due to relaxed regulatory guidelines around commodities, which many insiders have argued tokens should be classified as. In response to the SEC’s case, Coinbase announced that it had filed a petition to develop a new framework for crypto security rules.
The arrests follow a saga that largely unfolded on Twitter, in which a crypto personality who goes by Cobie discovered a wallet that had been used to buy up a number of cryptocurrencies prior to the announcement of a Coinbase listing of those assets.
A Justice Department investigation revealed that Wahi and his associates had pre-traded at least 14 asset listings on Coinbase, realizing profits of about $1.5 million. The group had purchased cryptocurrencies using accounts registered to other people and had transferred funds “through multiple anonymous Ethereum blockchain wallets,” according to the press release. Apparently, after an investigation into the trade, Coinbase contacted Ishan Wahi to schedule a meeting regarding the asset listing process, and Wahi attempted to leave the country, but was stopped by law enforcement before boarding.
This arrest follows the arrest in June of OpenSea CEO Nate Chastain, who was also charged with insider trading related to NFTs.
