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In late July, the US Securities and Exchange Commission brought insider trading charges against a former manager of Coinbase, the largest crypto-asset trading platform in the United States. The indictments are the latest step in the agency’s efforts to regulate cryptocurrency and could lead to a surge in cryptocurrency-related securities disputes.
in the SEC vs. Wahi, et. Althe SEC alleged that the former manager, Ishan Wahi, unlawfully provided or “overturned” material non-public information about the timing and content of Coinbase’s “stock market announcements” to his brother and a close friend. These individuals then allegedly used the information to trade ahead of several listing announcements and made at least $1.1 million.
According to the SEC, the insider trading scheme involved at least 25 different types of crypto assets. However, since Section 10(b) and Rule 10b-5 insider trading fees can only be charged “in connection with the purchase or sale of securities,” the SEC specifically claimed that nine of the crypto-assets traded were securities. His claims follow guidance in the SEC’s 2019 publication, “Framework for ‘Investment Contract’ Analysis of Digital Assets,” which states that a digital asset must be analyzed to determine whether it is a security must be analyzed using the test set out first SEC vs. WJ Howey Co., 328 US 293 (1946). Under the Howie Test, an “investment contract” exists when money is invested in a common enterprise with a reasonable expectation of gains from the efforts of others. Since the first two points are typically met in an offer and sale of a digital asset because the asset is being purchased as part of a “joint venture” or is otherwise acquired for value, the main question when analyzing a digital asset is whether it is a buyer has a reasonable expectation of gains (or other financial returns) from the efforts of others. like that in wahiComplaint filed by SEC Howie Test for each of the nine crypto assets – with much of the analysis focusing on whether investors had a reasonable expectation of profit based on the efforts of others.
The SEC’s decision to file this complaint brings uncertainty for Coinbase and other crypto asset trading platforms. Although the complaint indicates that the SEC considers some, but not all, crypto assets to be securities, the agency has not established a clear regulatory framework aside from its application of the SEC
Howie Test. The 2019 guidance provides some information, but makes it clear that it reflects the views of the SEC Strategic Hub for Innovation and Financial Technology only and is not an official rule, regulation, or statement by the Commission. And Coinbase itself is reportedly facing a separate SEC investigation into whether it listed digital assets that should have been registered as securities.
In response to the wahi Following the charges, Coinbase published a blog post arguing that none of the assets on its platform are securities, and that it “has filed a rulemaking petition with the SEC calling for actual rulemaking to help the cryptocurrency market.” has a chance to develop”. Ishan Wahi’s attorney also released a statement dismissing the SEC’s claims, stating that “prosecutors are trying to criminalize innocent behavior because they are looking for a scapegoat because so many people have been losing money in cryptocurrency lately.” “.
Other regulators have responded to the SEC’s factual action. In a public statement released the same day wahi Fees were announced, an officer for the Commodity Futures Trading Commission issued a statement criticizing wahi as “a striking example of ‘regulation through enforcement'” and claiming that important issues such as whether crypto assets are subject to securities laws should instead be addressed through the public notice and comment process. And the Justice Department’s parallel criminal lawsuit against the same three individuals brought wire fraud, but no securities fraud, charges – perhaps sidestepping any legal question as to whether the assets are securities. After Wahi’s brother Nikhil entered a guilty plea on Sept. 12, Assistant US Attorney Noah Solowiejczyk stated that whether cryptocurrency is a security is irrelevant to the wire fraud charge: “It is not an element of the crime for which it is committed.” the Defendant pleads guilty, and for that reason the Defendant’s decision to resolve this case with a wire fraud plea should not be construed as a statement as to whether those crypto-assets in question were in fact securities or whether the Defendant has any knowledge of them had to be securities.”
But even without further guidance, the SEC’s efforts to regulate certain crypto assets as securities should encourage private plaintiffs. According to a recent report, the number of class action lawsuits filed in 2022 involving cryptocurrency-related securities is on track to surpass the 2021 total. Three of those filings specifically contain allegations related to cryptocurrency securitization. In one example, earlier this month, a plaintiff shareholder filed a securities class-action lawsuit against Coinbase, alleging, among other things, that the company allowed individuals to trade digital assets that should have been registered with the SEC as securities. How these and other actions against cryptocurrency providers proceed will likely be affected by the outcome of the case wahi litigation.
Cryptic instructions? Despite regulatory ambiguity, the SEC’s new enforcement could lead to a surge in cryptocurrency-related class action lawsuits
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