Last week, the SEC filed a suit against yet another initial coin offering (ICO) from back in 2017, citing a sale of unregistered securities. This follows at least 56 other court cases (and counting) related to cryptocurrencies and ICOs that the SEC has pursued. Their latest action is a good reminder that the debate about whether the U.S. government is regulating crypto by enforcement is ongoing. 

One of the most talked about cases recently was in relation to three Coinbase employees. The US Department of Justice announced charges back in July against a former product manager at Coinbase, Ishan Wahi, along with his brother and a friend. They are accused of “wire fraud conspiracy and wire fraud in connection with a scheme to commit insider trading in cryptocurrency assets by using confidential Coinbase information."

💵 The U.S. Securities and Exchange Commission (SEC) alleges Ishan Wahi used confidential information he had access to as a Coinbase employee to tip off his brother and friend ahead of official listings of at least 25 crypto assets, earning over $1.1 million in illegal profits. The SEC’s civil charges against the trio allege that 9 of the 25 crypto assets were “securities,” which is a point of contention that will likely remain a recurring theme for crypto regulation in the U.S. 

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A few developments since then: 

📜 Back in July, Coinbase filed an official petition on the same day as the civil suit, asking the SEC to propose and adopt rules to govern digital asset securities (which would be guided by formal procedures and a public notice-and comment process), rather than arbitrary enforcement.  

📢 The SEC isn’t the only interested party, Commodity Futures Trading Commission (CFTC) Commissioner Caroline D. Pham made a statement: “The SEC complaint alleges that dozens of digital assets, including utility tokens and tokens related to DAOs are securities. […] The allegations have broad implications beyond the single case” and expressed that the CFTC should have a seat at the table if insider trading is suspected. 

⚖️ Earlier this month, while entering a not-guilty plea for his client Ishan Wahi, David Miller argued the charges should be dismissed because “insider trading needs to involve securities or commodities,” and there is no precedent to say the assets qualify as either.

⚖️ A similar argument was made by the attorneys of Nate Chastain (of OpenSea fame), who was indicted by the Department of Justice (DoJ) in June on two charges of wire fraud and money laundering based on insider NFT trading. His lawyers also filed a motion to dismiss the case last week in the US Southern District Court of New York, arguing “NFTs are neither securities nor commodities.”

Commissioner Pham and others have expressed concern about any agency regulating by enforcement “I don’t believe in any kind of ‘gotcha’ regulation, where the rules are constantly changing on people and they don’t know what they’re supposed to be doing.”

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Of course even without clear regulations, firms are strongly advised to follow best practice when it comes to internal policies and AML compliance. Reach out to sales@ospree.io to learn more. 

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🛏 Bed-time reading for those interested in the cases: 

The SEC says it has brought 56 court cases on crypto since 2017's DAO report - https://www.theblock.co/linked/84766/sec-56-court-cases-2017-dao 

SEC files suit against Dragonchain over $16.5 million ICO: https://www.theblock.co/post/163883/sec-files-suit-against-dragonchain-over-16-5-million-ico 

OpenSea Ex-Employee Asks Court to Dismiss Insider Trading Case: https://blockworks.co/opensea-ex-employee-asks-court-to-dismiss-insider-trading-case/‍

Coinbase ex-manager pleads not guilty to insider trading charges: https://www.reuters.com/technology/coinbase-ex-manager-pleads-not-guilty-insider-trading-charges-2022-08-03/ 

SEC Press Release: https://www.sec.gov/news/press-release/2022-127 

Coinbase Petition: https://www.sec.gov/rules/petitions/2022/petn4-789.pdf 

Excellent legal analysis in Forbes by Hailey Lennon: https://www.forbes.com/sites/haileylennon/2022/07/22/coinbase-is-ready-to-fight-the-sec/