SEC is Creating Rules via Judicial Precedent: Coinbase Fraud Case

In the past week, CI has reported on the enforcement action initiated by the Securities and Exchange Commission (SEC), involving a former Coinbase (NASDAQ:COIN) manager and two partners regarding allegations of insider trading.

According to the SEC’s complaint, non-public information was accessed prior to release, and the defendants traded on the information to generate illicit gains. Coinbase aided the SEC in their investigation but when the complaint became public Coinbase realized the SEC’s action included the accusation that it was trading digital securities – and thus effectively transgressing securities law. Coinbase defended its platform in a blog post by Paul Grewal, Coinbase Chief Legal Officer, claiming that the cryptocurrencies mentioned in the SEC’s complaint are not securities and subject to a rigorous review to determine this qualification.

Earlier today, CI received a comment from Arthur Jakoby, former SEC prosecutor and co-chair of the Securities Litigation and Enforcement Group at Herrick, Feinstein LLP in New York. Jakoby criticized the SEC’s byzantine approach to gunning for Coinbase.

Jakoby previously served as Special Trial Counsel in the SEC’s Division of Enforcement, where he prosecuted stock and accounting frauds, insider trading matters, and stock market manipulation cases – so he holds more than a bit of credibility.

Jakoby said:

“With the SEC complaint against a former Coinbase manager, and two other individuals, the SEC is once again gritting its teeth and flexing its regulatory muscles by attempting to legislate SEC rules governing digital assets through the creation of judicial precedent.”

the SEC is once again gritting its teeth and flexing its regulatory muscles by attempting to legislate SEC rules governing digital assets through the creation of judicial precedent Click to Tweet

Jakoby added that there is currently no specific SEC legislative rule designating when a digital asset is a security and subject to the SEC’s regulatory maze and insider trading bans.

“Instead of engaging in transparent and public rulemaking, with industry comments, which would result in clearly defined rules and regulations regarding digital assets, the SEC has chosen to mark its regulatory territory via enforcement actions in the federal court system.”

The SEC under the leadership of Gary Gensler has taken a very specific approach – all digital assets are securities – with the exception of Bitcoin (and perhaps Ethereum). So the battle lines are drawn – at least until the SEC’s tempers its approach or Congress legislates new rules.

Instead of engaging in transparent and public rulemaking, with industry comments, which would result in clearly defined rules and regulations regarding digital assets, the SEC has chosen to mark its regulatory territory via enforcement actions in the federal court system Click to Tweet
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