US Charges Former Coinbase Manager in First Crypto Insider Case, Regulatory Territory Battle Likely | Compliance learning and regulatory intelligence from Thomson Reuters

The SEC’s first insider trading case involving cryptocurrencies underscores the agencies’ desire to establish jurisdiction in this area.

U.S. securities authorities recently announced charges against a manager of major 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) determination to assert its jurisdiction over cryptocurrencies and other digital assets it considers securities and pointed to a potential dispute among regulators over the scope of the agency.

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

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

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


For more information 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,” a claim that caught the attention of many attorneys, crypto legal experts, advocates, and former and current commissioners of the Commodity Futures Trading Commission (CFTC). ), who said the case could have wide-ranging implications.

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In announcing the SEC caseGurbir S. Grewal, Director of the SEC’s Division of Enforcement, said, “We are not concerned with labels, but with the economic realities of an offering. In this case, those realities affirm that several of the crypto assets in question were securities; and, as alleged, the defendants engaged in typical insider trading prior to their listing on Coinbase. Rest assured, we will continue to ensure a level playing field for investors, regardless of the label placed on the securities involved.”

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

The Justice Department said the Wahi brothers were arrested in Seattle, while Ramani remains at large. Prosecutors also said Ishan Wahi had purchased a one-way plane ticket to India after a Coinbase chief security officer summoned him to the company’s Seattle office for a meeting. Police 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 take action against Coinbase for listing tokens it considered securities in the complaint. “Coinbase treated such information as confidential and cautioned its employees not to trade based on such information or report it to others,” the SEC stated.

Coinbase had shared the findings of an internal investigation into the trade with prosecutors, 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.

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Paul Grewal, Chief Legal Officer of Coinbase, disputed the SEC’s claim that the instruments involved were securities. “Coinbase does not list securities. Period,” Grewal wrote on Twitter. “We have cooperated with both the DOJ and the SEC in this investigation,” Grewal said. “The DOJ reviewed the same facts and decided not to bring securities fraud charges against those involved.” (Coinbase CLO Grewal does not appear to be related to the SEC’s Grewal.)

Andrew St. Laurent, an attorney 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 application” and a possible territorial war

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

He said the case could have “broad implications” and stressed that it was critical that regulators work together. “Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input, through the development of notice and comment rules in accordance with the Administrative Procedure Act,” he 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 raw Materials and therefore subject to its own jurisdiction. A federal jury’s decision in Boston in late July demonstrated legal support for that view. The founder of a defunct cryptocurrency business has been convicted of fraud over false claims that his virtual currency was backed by $300 million in gold. The jury found Randall Crater, 51, guilty of committing wire fraud and illegal money transactions. The CFTC lawsuit against Crater and his failed company, Nevada-based My Big Coin Inc., led to one of the first court rulings holding that a virtual currency could be considered a commodity within CFTC jurisdiction. .

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

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