Last week, the Securities and Exchange Commission filed a lawsuit against the perpetrators of an alleged insider trading scam utilizing privileged information from Coinbase. A former Coinbase manager, along with two co-conspirators, have been charged as well. The former Coinbase manager, Ishan Wahi, his brother Nikhil Wahi, and Sameer Ramani have been charged with violating the antifraud provisions of securities law. The trio is also facing a criminal indictment.
Following the news, two CFTC Commissioners issued responses.
Commissioner Kristin Johnson said while conversations regarding regulation of crypto may invite debate, all will agree that “fraud, misrepresentation, and deception or lying, cheating, and stealing—are not be permitted.”
“Our commitment to enforcing against such conduct rises to singular and critical importance when fraudsters intentionally target vulnerable retail market investors. Existing laws and regulations expressly prohibit such misconduct in our markets for good reason. Financial market regulators and law enforcement stand united, prepared to enforce against such predatory and abusive behavior. Simply stated, certain values and principles are deeply embedded in the statutes, regulations, and jurisprudence that govern our markets. These values and principles aim to protect market participants, including retail customers with limited resources (particularly those who may face fragile financial circumstances), and preserve the integrity of our preeminent financial markets.”
Commissioner Caroline D. Pham took a different spin on the enforcement action, slamming regulators for, once again, pursuing regulation by enforcement – as opposed to actually creating clear-cut rules.
Pham said SEC v. Wahi is a striking example of “regulation by enforcement.”
“The SEC complaint alleges that dozens of digital assets, including those that could be described as utility tokens and/or certain tokens relating to decentralized autonomous organizations (DAOs), are securities. The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together. Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input—through notice-and-comment rulemaking pursuant to the Administrative Procedure Act. Regulatory clarity comes from being out in the open, not in the dark.”
So which Commissioner is correct? Both are, but Pham makes an important statement that Johnson avoids.
The legitimate segment of the crypto industry seeks to guard against fraud vigorously. But the SEC took the opportunity to burn bridges instead of building them in its complaint regarding the insider trading allegations. Coinbase, a company that is publicly traded and had its registration statement approved by the SEC, quickly defended its operations explaining they have never listed a security. If Coinbase listed unregistered securities – as the SEC implies, it is breaching securities law, so the allegations by the SEC include collateral damage – even though Coinbase worked with the SEC to bring the perpetrators to justice.