US Charges Former Coinbase CEO in First Crypto Insider Trading Case, Regulatory Turf Fight Likely | Thomson Reuters Regulatory Intelligence and Compliance Learning

US securities regulators recently announced charges against an executive 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 it deems 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 about new cryptoassets that Coinbase would allow users to trade through its exchange with his brother and Ramani.

Nikhil Wahi and Ramani allegedly bought 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 to April 2022, according to the charges.

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

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

The SEC said at least nine of the crypto assets involved “were securities,” a claim that caught the attention of many lawyers, crypto-legal experts, advocates 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 with the economic realities of an offering. In this case, these realities confirm that a number of the cryptoassets in question were securities; and, as alleged, the defendants typically engaged in insider trading prior to listing on Coinbase. Rest assured that we will continue to ensure a level playing field for investors, regardless of the label on the securities involved.”

Damian Williams, the U.S. attorney in Manhattan, said in a statement: “Fraud is fraud is fraud, whether it happens 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 security director at Coinbase summoned him to the company’s Seattle office for a meeting. Law enforcement prevented him from boarding the flight on May 16, prosecutors said.

Coinbase response

An SEC official said the investigation is continuing and declined to say whether it would take action against Coinbase itself for listing the tokens it considered securities in the complaint. “Coinbase treated such information as confidential and cautioned its employees not to act on, or tip off others with, that information,” the SEC stated.

Coinbase had shared with prosecutors findings from an internal investigation into the trade, the company’s chief security officer Philip Martin explained. “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, Coinbase’s general counsel, disputed the SEC’s claim that the instruments involved were securities. “Coinbase does not list securities. Period,” Grewal wrote on Twitter. “We have been cooperating 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. An attorney for Nikhil Wahi did not immediately respond to requests for comment. An attorney 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 issued a statement suggesting the SEC was setting policy “in the dark” and without accountability. “The matter 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 associated with decentralized autonomous organizations (DAOs), are securities.”

She said the case could have “broad implications” and stressed it was crucial for regulators to work together. “Major issues are best resolved through a transparent process that engages the public in developing appropriate policy with expert input — through notice-and-comment regulations under 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 claims about the nature of cryptocurrencies, calling them goods and thus subject to its own jurisdiction. A federal jury decision in Boston in late July demonstrated legal support for this view. The founder of a defunct cryptocurrency business was convicted of fraud over false claims that the virtual currency was backed by $300 million in gold. The jury found Randall Crater, 51, guilty of wire fraud and making illegal money 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 decisions ruling 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 SECs Wow case: “Regulation by enforcement, threats, influence, public relations or other means beyond the APA (Administrative Procedure Act) rulemaking process is completely inappropriate,” Quintenz said on Twitter.

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