A lawsuit in which a Coinbase employee shared insider information with his brother and friends is in the spotlight as legal debate continues over whether sales of cryptocurrencies constitute securities. The main defendant, former Coinbase employee Ishan Wahi and his brother, have reached a settlement with both the Department of Justice and the Securities and Exchange Commission, but his friend Sameer Ramani remains at large. be.
On Friday, a federal judge in the Western District of Washington issued a ruling in the case against Samani. The ruling, which partially granted the SEC's request for a default judgment, could have serious implications for both Ramani and the broader crypto industry.
In the decision, Judge Tana Lin stated that the case falls under the jurisdiction of the SEC because the crypto assets at issue are securities even though they are traded on the secondary market Coinbase. It was decided that As courts grapple with the question of when crypto assets become securities, the ruling supports Chairman Gary Gensler's argument that most industry activity falls under the jurisdiction of federal judges. This is the strongest judgment ever.
Howie and his frustrations
Since the rise of cryptocurrencies like Bitcoin and Ether, regulators have grappled with how to classify digital assets. Should they be classified as securities, such as bonds or stocks, or as commodities, such as gold or wheat?
Bitcoin is currently the only virtual currency with clear regulations, and the Commodity Futures Trading Commission declared it a commodity in 2015. Other assets remain in a gray area. As a result, when exchanges like Coinbase offer cryptocurrencies for trading, they are under legal risk, despite declaring their belief that cryptoassets should be classified in a separate regulatory category. It has been operated by.
Starting with SEC Chairman Jay Clayton and continuing under Gensler, the SEC has filed enforcement actions against crypto companies alleging that they issue or sell unregistered securities. campaign has been promoted. With high-profile lawsuits against companies like Ripple, Coinbase, and Binance, the SEC is taking advantage of the lack of legislative action in Congress to expand its jurisdiction over large swaths of crypto assets.
Federal judges in various cases have previously taken different positions on securities issues, adding to the uncertainty. In July, Judge Annalisa Torres of the Southern District of New York issued her long-awaited ruling in the Ripple case, arguing that selling Ripple's XRP tokens directly to institutional investors such as hedge funds constitutes an unregistered security. It shocked the industry. This was not the case with secondary sales on platforms such as exchanges.
Later that month, Judge Jed Rakoff, also of the Southern District of New York, disagreed with her logic. In his ruling denying a motion to dismiss by defendant cryptocurrency company Terraform Labs, he wrote that he rejected this approach.
He said, “Courts have ruled that coins sold directly to institutional investors are considered securities, while coins sold to retail investors through secondary market transactions are not. It refuses to differentiate between coins.”
In December, Lakoff ruled in favor of the SEC, agreeing that four crypto tokens offered by Terraform Labs constituted unregistered securities.
The issue is further complicated by two high-profile lawsuits filed by the SEC against major crypto exchanges Coinbase and Binance. Unlike Ripple and Terraform Labs, the issue with these two exchanges is solely about trading tokens on their venues, not issuance.
In U.S. case law, the definition of a security is based on a Supreme Court precedent known as the Howie test, which states that a security is an investment of money in a public corporation with the expectation of a profit from the efforts of others. It is defined as. The companies are seeking dismissal of the lawsuit, with lawyers arguing that under Howie, securities must include an actual investment contract, but that contract does not exist when buying crypto assets on an exchange. are doing. A third exchange, his Kraken, employed the same logic in seeking dismissal of its own case by the SEC. The justices have not yet ruled on Coinbase and Binance's claims, and a hearing on Kraken's claims is scheduled for June.
insider trading
The SEC's Coinbase insider trading case is a more complex case because the defendants are not crypto companies but individuals accused of using insider information for personal gain.
In two lawsuits brought by the SEC and the Department of Justice, prosecutors allege that Coinbase employee Ishan Wahi shared confidential information with his brother and friends, who profited from more than $1.5 million in trades. He claimed to have been able to do so.
The SEC lawsuit has drawn concern from the crypto industry from the beginning. To establish jurisdiction in this case, the SEC alleged that the defendants were trading unregistered securities on Coinbase. In this case, it was a lesser-known token like AMP or DDX, not a major cryptocurrency like Ether or Solana. Prominent crypto companies such as Coinbase and Paradigm have filed “friend of the court” briefs challenging the SEC.
Mr. Wahi and his brother avoided the risk of a judge ruling in favor of the SEC on the issue of token safety and settled with both the SEC and the Department of Justice. That is not the case for Mr. Ramani, a friend whom the SEC believes is in India, leading the agency to seek a default judgment in the case.
On Friday, Lin ruled in favor of the SEC, agreeing that sales of crypto assets constitute securities even when sold on the secondary market. She argued in her decision that the tokens have been widely promoted by the issuer and are therefore expected to increase in value. Additionally, the issuer facilitated her trading on secondary trading markets like Coinbase.
“The court's analysis remains the same regardless of the extent to which Ramani traded the tokens.
secondary market,” Lin wrote, arguing that the blurb applies equally to tokens purchased by investors, whether directly from the issuer or on a trading platform. “Each Issuer continued to make such representations regarding the profitability of the Tokens while the Tokens were traded on the secondary market.”
As a result, Mr. Lin ruled that all crypto assets purchased and traded by Mr. Ramani constituted investment contracts. Unlike the Lakoff decision in the Terraform case, the Lin decision is significant because it involves secondary transactions rather than direct sales from the issuer.
Notably, this case is being heard in the Western District of Washington, which is in the same appellate circuit as the Kraken case, which is pending in the Northern District of California. If either case is appealed to circuit court, the three-judge panel's decision will likely apply to the other case. In any case, the question of whether crypto assets qualify as securities is likely to reach the Supreme Court, as multiple cases are being heard in various circuits across the country.
An SEC spokesperson, Mr. Ramani, and Mr. Ramani's attorney did not respond to requests for comment.
