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On July 21, the U.S. Attorney’s Office for the Southern District of New York and the Securities and Exchange Commission (SEC) announced insider trading allegations against three defendants related to the trading of crypto assets, in what U.S. Attorney Damian Williams heralded as the “first ever insider trading case involving cryptocurrency markets.”

The government charged Ishan Wahi, a former Coinbase Global, Inc. (Coinbase) product manager, along with Nikhil Wahi, and Sameer Ramani with “wire fraud conspiracy and wire fraud in connection with a scheme to commit insider trading in cryptocurrency assets by using confidential Coinbase information.” Ishan Wahi allegedly provided non-public information to his brother and friend regarding specific crypto assets which were scheduled for listing on Coinbase’s exchanges, allowing them to purchase those assets and benefit from the “bump” that typically occasions an asset being added to the exchange.

Coinbase is one of the world’s largest cryptocurrency exchange platforms worldwide, which can be used to acquire, trade, and/or sell crypto assets – i.e., a secondary market for crypto assets. As the U.S. Department of Justice (DOJ) and SEC allege, the market value of a given crypto asset typically increases when Coinbase announces that the asset will be added to its exchange.

According to the DOJ, beginning at least in June 2021, Ishan Wahi started providing non-public information, in violation of his duty of confidentiality to Coinbase, to his brother, Nikhil Wahi, and/or his friend, Sameer Ramani, so that crypto assets could be purchased before their listing on Coinbase’s exchange and in advance of any public announcement. The defendants would then allegedly sell the assets for a profit. The DOJ alleges that the three defendants collectively traded in advance of at least 14 separate public listing announcements by Coinbase regarding at least 25 different crypto assets, “generated realized and unrealized gains totaling at least approximately $1.5 million.”

Continuing its focus on cryptocurrency exchanges, the SEC also filed a complaint against the three individuals, alleging that “at least nine” of the 25 crypto assets purchased as part of the alleged scheme were securities, which the SEC refers to as “crypto asset securities” as opposed to mere “crypto assets.”1 According to the SEC, certain digital tokens or crypto assets are securities because they meet the definition of an “investment contract,” that is, they “constitute[] an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”2 This standard for determining whether a transaction is considered an investment contract (and, therefore, a security), is known as the “Howey Test,” set forth in the Supreme Court case SEC v. Howey Co., 328 U.S. 293, 298-99 (1946).

The SEC complaint alleges the nine crypto assets here bore the “hallmarks” of a security under the Howey test3 and provides a detailed application of the test to each of these crypto assets. First, the crypto assets were offered and sold by an issuer to raise money for the issuers’ business.4 Second, issuers and promoters solicited investors by touting the potential for investors to earn profits by trading these cryptoassets.5 Third, issuers and promoters emphasized that investors could trade the crypto assets in secondary markets— like Coinbase.6 The SEC summarized its position with respect to the assets alleged to be crypto asset securities stating:

These hallmarks of the definition of a security continue to be true for the nine crypto asset securities that are the subject of the trading in this complaint, including continuing representations by issuers and their management teams regarding the investment value of the tokens, the managerial efforts that contribute to the tokens’ value, and the availability of secondary markets for trading the tokens. Thus, at all times relevant to the conduct alleged in this complaint, a reasonable investor in the nine crypto asset 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.7

Coinbase, for its part, rejected the SEC’s claim that certain of the crypto assets traded by the defendants constitute securities, stating:

We understand that the SEC has separately filed securities fraud charges related to this wrongdoing today. The DOJ did not charge securities fraud. No assets listed on our platform are securities, and the SEC charges are an unfortunate distraction from today’s appropriate law enforcement action.

While Coinbase no doubt seeks to ensure its platform serves as a level playing field, it appears to be bristling at the enhanced security that would result from the SEC’s more aggressive categorization of crypto assets as securities. On the same day the SEC action was filed, Coinbase filed a petition with the SEC seeking rulemaking to identify which digital assets are securities and to adopt rules to govern them, observing that the Unites States does not have a functioning market in digital asset securities due to the lack of a clear and workable regulatory regime.

The SEC complaint also drew comment from Commodity Futures Trading Commissioner Caroline D. Pham, who observed that the complaint was a “striking example of regulation by enforcement.” She observed that the SEC’s allegations could have broad application and underscore the need for regulators to work together using a transparent process.

SEC officials have, in the past, acknowledged that digital assets that are true replacements for currencies, such as Bitcoin, are commodities rather than securities, and should therefore be regulated by the Commodity Futures Trading Commission, rather than the SEC. While the SEC’s Director of the Division of Corporation Finance, in 2018, had previously noted that sales of Ether, like those of Bitcoin, “are not securities transactions,” current SEC Chairperson Gary Gensler, in a June 2022 interview, declined to identify any crypto assets other than Bitcoin as a commodity.

Following the DOJ’s indictments and the complaint by the SEC, Bloomberg reported that the SEC’s Enforcement Division is directly investigating whether Coinbase “improperly let Americans trade digital assets that should have been resisted as securities.” This follows a disclosure by Coinbase in its first quarter earnings report that it had “received investigative subpoenas from the SEC for documents and information about certain customer programs, operations, and intended future products, including the company’s stablecoin and yield-generating products.”

Key Takeaways

The DOJ announcement of insider trading charges sends a clear signal that the crypto asset market is not beyond the reach of the Criminal Division. This announcement follows the June 30, 2022 announcement of fraud charges against six individuals related to the use of cryptocurrencies and/or non-fungible tokens. While the DOJ may have been slow to move into the digital asset space, there can be no doubt that it will continue to target crypto currency- related financial crime.

The SEC has unequivocally stated that nine crypto assets (AMP (AMPY), Raly (RLY), DerivaDex (DDX), XYO (XYO), Rari Governance Token (RGT), LCX (LCX), Powerledger (POWR), DFX Finance (DFX), and Kromatika (KROM)) are securities. Individuals and entities who own or trade those securities are on notice that the SEC considers them to fall within its subject-matter jurisdiction.

The SEC can be expected to continue to apply the securities laws to most crypto assets. Holders of crypto assets that bear the same “hallmarks” as the nine crypto assets above—such as those issued to raise funds, acquired with an expectation of profit, and available to trade on the secondary market—should be prepared for the SEC to view those assets as securities.

As the DOJ and SEC begin to more aggressively police the crypto asset market, issuers and investors alike should consult with competent counsel to ensure compliance with applicable laws and regulations. Attorneys at Buchanan Ingersoll & Rooney are prepared to navigate the government’s developing enforcement priorities in this area.

  1. Compl., Sec. & Exch. Comm’n v. Wahi et al., at ¶¶ 7, 24, available at .
  2. Id. ¶ 24.
  3. Id. ¶ 94.
  4. Id. at ¶ 90.
  5. ¶ 91.
  6. Id. 
  7. Id. at ¶ 94.