Today the United States The Justice Department has charged three suspects for their alleged involvement in an insider trading scheme, one of the suspects was a former Coinbase employee. The case looks set to have major implications for the crypto industry.
Following the DoJ’s announcement, the Securities and Exchange Commission (SEC) filed a complaint in 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 illegal activity and investigate any suspected misconduct. In April, we received reports of a possible “frontrunning” of assets shortly before listing 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 profit from future listing announcements from Coinbase. Whenever an asset is listed on this platform, its value often trades higher, which could prove beneficial for people with extensive knowledge of these announcements.
Wahi reportedly provided this information to his brother Nikhil and Ramani. From June 2021 to April 2022, the suspects allegedly benefited from more than 14 ads making more than $1.1 million in profits and violating US securities regulations, according to the Commission.
US regulators will use the case to prove that at least 9 of the 25 tokens traded by the system are unregistered securities. According to the complaint, these assets function as “investment contracts” sold to investors with a “reasonable expectation of profit from the efforts of others.”
Gurbir Grewal, Director of the SEC’s Enforcement Division, said the following about the Commission’s complaint and its ultimate goal, which he says focuses on “economic realities” rather than labels:
In this case, these facts claim that a number of the crypto assets at issue were securities and, as alleged, the defendants engaged in typical insider trading prior to their listing on Coinbase. Rest assured that we will continue to ensure a level playing field for investors, regardless of the label assigned to the securities concerned.
Why Coinbase’s Inside Trading System Could Impact The Crypto Industry
Among the cryptocurrencies considered 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 details in detail the background of each of the 9 cryptocurrencies called “crypto-asset 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, Jake Chervinsky, Chief Counsel Policy Officer for the Blockchain Association, said the SEC’s complaint should be viewed as “allegations, not facts.” Chervinsky said:
The SEC alleges in today’s complaint that nine digital assets are securities, but does not explain their analysis for just one. Nor did they sue the issuers or the exchange where the tokens were traded: the people with the resources to fight back. They just went after a man and his family. It’s hard to overstate how much of a mess it will be.
The SEC appears to be pushing to expand its jurisdiction over the digital asset industry. As reported by Bitconist, SEC Chairman Gary Gensler said he was “willing” to only admit Bitcoin as a commodity. Therefore, as an asset beyond the reach of the regulator.