Former Coinbase Manager Charged with Insider Trading Could Potentially Be Crypto’s Legal Hope: Report

Crypto appears to have chosen an unlikely supporter in its ongoing struggle against oversight by the US Securities and Exchange Commission: an ex- Coinbase worker who was convicted of allegedly engaging in insider trading. This, according to a recent report by the WSJ.

Ishan Wahi, an ex-manager at digital asset firm Coinbase (NASDAQ:COIN), recently pleaded guilty to giving his brother, as well as a college acquaintance, various crypto trading tips that reportedly generated around $1.5 million in unlawful gains. An Indian immigrant, he might serve over three years behind bars and then would get deported after completing his sentence.

However, it now appears that Wahi has not given up because he’s currently fighting the US Securities and Exchange Commission (SEC), which had sued him because the regulator stated that a certain portion of Coinbase assets was classified as securities.

The overall outcome of that particular civil case is not likely to significantly change Wahi’s future, which has now been negatively impacted by his prosecution and expected imprisonment. However, it may also impact the manner in which crypto-assets are regulated in the United States.

As part of a motion looking for early dismissal of the case in Seattle’s federal court, Wahi’s legal team is arguing that the SEC does not have a role in the matter. That’s because Coinbase’s crypto-assets do not qualify as securities. Prosecutors had reportedly charged him with conspiracy to engage in wire fraud, but it was not actually securities fraud.

Opposing the SEC in lawsuits such as the one filed against Wahi has become the crypto sector’s best chance for fighting back against the SEC’s efforts to regulate crypto-assets. The sector is now hoping that the judges will determine that crypto is far too different from traditional stocks and bonds to be categorized under rules applicable to traditional financial instruments.

Since Coinbase has also been a major target of an SEC enforcement action, Wahi’s prospects seem to be aligned with the firm’s, even though the company fired him and had also cooperated with the probe involving his alleged role in insider trading.

The SEC’s representative this past week informed Coinbase that it is likely to seek enforcement action against the firm over listing various assets that authorities claim are securities. This, among other potential violations, the team at Coinbase confirmed.

If the SEC does actually sue Coinbase, the result of that might force the firm to suspend the trading of certain crypto-assets that it offers to its customers and potentially affect the overall growth of the nascent sector.

Regulators’ civil case filed against Wahi, which is currently ongoing, is most likely to play out prior to any large legal action against Coinbase is addressed, and its outcome might even establish a precedent for what types of assets the SEC may regulate.

Nick Morgan, an attorney whose organization, Investor Choice Advocates Network, represents individuals combatting what it refers to as the SEC‘s overreach, said:

“This goes beyond the impact of the prior enforcement cases where the entire case came down to that early point in the life of a token, when the company exchanges it for money. The Wahi case has a much larger impact because this by definition involves secondary and not initial transactions.”

The ICAN Group is reportedly among other organizations that filed friend-of-the-court briefs that are supporting Wahi’s main arguments.

The Digital Chamber of Commerce and the Blockchain Association have also submitted briefs that have attacked the SEC’s ongoing case. Coinbase has reportedly requested the judge to allow the firm to share its views on the matter.

As first reported by the Guardian, the Jones Day law firm is representing Wahi against the SEC and has also filed a motion in order to dismiss the ongoing case in February.

Coinbase is not paying for Wahi’s legal team. This, according to sources who claim to be familiar with the issue.

As part of their motion, Jones Day stated that the SEC’s activities that attempt to oversee crypto violate the major-questions doctrine that was introduced by the US Supreme Court. The standard prohibits regulatory authorities from making rules or taking actions that have major economic or political impact without what most justices believe to be clear direction from Congress.

Jones Day also expresses concerns regarding the SEC’s dependence on a really old Supreme Court test known as Howey in order to regulate most cryptocurrency-related initiatives. The Howey case offered a definition for an “investment contract,” which is essentially a type of security that could be regulated by the SEC.

Jones Day and other legal representatives for Wahi noted:

“The SEC may not use the phrase ‘investment contract’ as a blank check to cash whenever it seeks to expand its regulatory ambit.”

It’s worth noting that at his recent plea hearing on the wire-fraud charges last month, Wahi had actually admitted to tipping his brother and colleague, named Sameer Ramani.

However, he clarified that he had “relied on the statements of Coinbase and others that these cryptocurrencies are not securities.” He has also reportedly apologized and stated that he would lose “the entire life that [he’s] worked hard to build over the last 17 years.”

Wahi is now expected to be sentenced in May of this year.

His brother, who has reportedly pleaded guilty to the criminal charges, has already been sentenced back in January to serve 10 months in prison. He was also ordered to forfeit $892,500 in trading-related profits.

Notably, Coinbase is also planning to intervene in Wahi’s case with a friend-of-the-court brief.

The firm currently faces the possibility of an SEC suit claiming it violated applicable laws that require registration as a licensed securities brokerage as well as an exchange operator. This, according to a copy of the SEC’s enforcement warning, referred to as a Wells notice.

The firm’s lawyers have stated:

“The SEC’s allegations in this case hinge on the agency’s erroneous contention that Coinbase has listed digital assets that are securities.”

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