In recent days, the Securities and Exchange Commission (SEC) filed an enforcement action alleging insider trading involving a former Coinbase (NASDAQ:COIN) manager and two other partners. Simultaneously, criminal charges were filed by the US Department of Justice. Buried within the SEC complaint was the statement that the perpetrators of the insider trading scheme engaged in insider trading of “crypto-asset securities.”
The SEC has long claimed that most, or many, digital assets were, in fact, securities and thus skirting securities laws. While the SEC has conceded that Bitcoin is not a security and probably not Ethereum, everything else remains on the table.
While Coinbase clearly aided the SEC in its enforcement action of the digital asset insider trading, the SEC has incorporated another shot across the bow in the industry by labeling some of the digital assets as securities. To quote the SEC’s complaint:
“Between at least June 2021 and April 2022, blockchain addresses linked to Nikhil [Wahi] and [Sameer] Ramani traded ahead of – sometimes just minutes before – more than 10 such announcements, trading in at least 25 crypto assets. As alleged in this Complaint, this repeated pattern of Ishan tipping Nikhil and Ramani with inside information, followed by Nikhil and Ramani trading on that information, included trading in at least nine crypto asset securities, which were listed in seven of these announcements.” [emphasis added]
The SEC complaint also claims:
“Crypto Asset Securities. A digital token or crypto asset is a crypto asset security if it meets the definition of a security, which the Securities Act defines to include “investment contract,” i.e., if it constitutes an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others. As described in greater detail below, during the relevant period, Ishan provided material, nonpublic information about, and Nikhil and Ramani traded in, at least nine crypto asset securities that meet this definition … The existence of the secondary trading market offered by platforms such as Coinbase allows market participants to buy and sell crypto assets, including crypto-asset securities. Secondary market trading in crypto assets has grown exponentially, and the announcement of the listing of a crypto asset, including a crypto asset security, on Coinbase typically causes that asset’s price and trading volume to rise dramatically. “
The SEC states that these digital assets were securities and subject to securities laws “because these crypto assets were investment contracts; they were offered and sold to investors who made an investment of money in a common enterprise, with a reasonable expectation of profits to be derived from the efforts of others,” referencing the Howey test.
Paul Grewal, Coinbase Chief Legal Officer, took to the Coinbase blog asserting that the crypto exchange does not ever list securities on its platform.
“The SEC alleges that nine digital assets involved are securities. The DOJ reviewed the same facts and chose not to file securities fraud charges against those involved. As CFTC Commissioner Caroline Pham stated, this is “a striking example of ‘regulation by enforcement” by the SEC.”
Grewal said that seven of the nine cryptocurrencies mentioned in the SEC’s complaint are listed on Coinbase, but none of these are securities. He explained that Coinbase incorporates a “rigorous review” to determine whether or not a crypto is a security, and they opt not to list most digital assets which are reviewed.
Taking offense, Grewal noted that Coinbase worked with the SEC on the enforcement action but instead of having a dialogue with Coinbase, the SEC “jumped directly to litigation.”
Coinbase has filed a petition for rulemaking, asking the SEC to create actual rules instead of the current opaqueness that undermines the digital asset sector.
While the SEC did not need to label certain cryptocurrencies as securities, by doing so, it asserts its authority to regulate crypto. This most recent SEC enforcement action once again highlights the need for legislation to clarify crypto in the US, as the Commission appears to be steadfast that cryptocurrencies are securities (unless compelled otherwise).