Today, the U.S. Department of Justice brought charges on three suspects for their alleged involvement in an inside trading scheme, one of the suspects was a former Coinbase employee. The case seems poised to have major implications for the crypto industry.
Following the announcement from the DoJ, the Securities and Exchange Commission (SEC) filed a complaint in the federal district court in Seattle, Washington, with charges against Ishan Wahi, Nikhil Wahi, and Sameer Ramani. The first of these individuals worked as a product manager at the exchange.
1/ At Coinbase, we actively monitor for illegal activity and investigate any alleged misconduct. In April, we received information about possible frontrunning of assets shortly before being listed on Coinbase. We immediately launched an investigation into this.
— Brian Armstrong – barmstrong.eth (@brian_armstrong) July 21, 2022
The suspect allegedly used confidential information to benefit from future Coinbase listing announcements. Whenever an asset is listed on this platform, its value often trades to the upside which could prove beneficial for people with inside knowledge of these announcements.
Wahi allegedly provided this information to his brother Nikhil and to Ramani. From June 2021 to April 2022, the suspects allegedly benefited from over 14 announcements making over $1.1 million in profits and violating U.S. securities regulations, according to the Commission.
The U.S. regulators will use the case to prove that at least 9 out of the 25 tokens traded by the scheme are unregistered securities. Per the complaint, these assets operate as “investment contracts” sold to investors with a “reasonable expectation of profits to be derived from the efforts of others”.
Gurbir Grewal, Director of the SEC’s Division of Enforcement, said the following on the Commission’s complaint and their ultimate goal which he said is focused on “economic realities” rather than labels:
In this case, those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase. Rest assured, we’ll continue to ensure a level playing field for investors, regardless of the label placed on the securities involved.
Why The Coinbase Inside Trading Scheme Could Impact The Crypto Industry
Amongst the cryptocurrencies deemed securities by the Commission, the complaint mentions AMP, an Ethereum-based token launched by a company called Flexa Network; RLY, another Ethereum-based token launched by the Rally Network; DDX, launched by DerivaDEX in July 2020.
The Commission goes into great detail about the background of each of the 9 cryptocurrencies referred to as “crypto-assets securities”. Other digital assets include XYO, RGT, LCX, POWR, DFX, and KROM. The majority of these tokens were launched on the Ethereum blockchain under the ERC-20 standard.
Commenting on the case and the potential implications for the industry, Head of Policy for the Blockchain Association lawyer Jake Chervinsky said the SEC’s complaint must be considered as “allegations, not facts”. Chervinsky said:
The SEC alleges in today’s complaint that nine digital assets are securities, but don’t explain their analysis for even one. They also didn’t sue the issuers or exchange where the tokens traded: the people with resources to fight back. They just went after one man & his family. It’s hard to overstate what a mess this will be.
The SEC seems to be making a push to extend its jurisdiction on the digital asset industry. As Bitconist reported, SEC Chair Gary Gensler said he was “willing” to admit only Bitcoin as a commodity. Therefore, as an asset outside of the regulator’s reach.