Federal Court upholds SEC’s stance on cryptocurrency as securities in insider trading saga

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Ishan Wahi, a former Coinbase employee

4th March 2024 – (New York) The debate within the U.S. legal system over the classification of cryptocurrency assets has taken a significant turn. Amidst the ongoing discussion, a federal judge in the Western District of Washington has delivered a pivotal ruling in a case involving insider trading at Coinbase, with broader implications for the entire cryptocurrency industry.

The court case in question centred on Ishan Wahi, a former Coinbase employee, who, along with his brother, has settled charges with the Department of Justice and the Securities and Exchange Commission (SEC). However, the case against their associate, Sameer Ramani, has escalated with Ramani currently beyond the reach of U.S. authorities.

In a recent development, Judge Tana Lin has partially granted the SEC’s request for a default judgment against Ramani. This ruling is a significant endorsement of SEC Chair Gary Gensler’s stance that most cryptocurrencies and their related activities fall under the SEC’s regulatory scope. Judge Lin determined that the crypto assets in question are indeed securities, aligning with the SEC’s jurisdiction, even though these assets are traded on secondary markets like Coinbase.

This decision reinforces the SEC’s enforcement campaign initiated under previous chair Jay Clayton and perpetuated under Gensler. The SEC has consistently pursued actions against crypto firms, such as Ripple, Coinbase, and Binance, arguing that they deal in unregistered securities. This has been a contentious issue, with federal judges offering varying opinions on the matter.

For instance, Judge Analisa Torres of the Southern District of New York differentiated between direct sales of Ripple’s XRP tokens to institutional investors and secondary market transactions, considering only the former as unregistered securities. Conversely, Judge Jed Rakoff rejected such a distinction in a case involving Terraform Labs, siding with the SEC.

The legal framework for determining what constitutes a security in the U.S. is based on the Supreme Court’s Howey test, which focuses on the investment of money in a common enterprise with the expectation of profits primarily from the efforts of others. Crypto exchanges Coinbase, Binance, and Kraken have all sought to dismiss SEC lawsuits by arguing that their trading activities do not involve investment contracts as defined by Howey.

In the insider trading case at hand, the SEC’s position is that Wahi’s divulgence of confidential information to Ramani, leading to over $1.5 million in profits, involved trading unregistered securities. While Wahi and his brother settled, avoiding a definitive legal ruling on the securities status of the traded tokens, Ramani’s continued absence has led to the SEC’s push for a default judgment.

Judge Lin’s ruling, which identifies the tokens as securities based on the issuers’ promotional activities and the facilitation of their trading on platforms like Coinbase, marks a significant moment for the SEC’s jurisdiction over secondary market transactions.

The outcome of this case, along with several other ongoing lawsuits across different judicial circuits, suggests that the issue of cryptocurrency as securities is far from settled and may ultimately require Supreme Court adjudication. The SEC, Ramani, and his legal representation have yet to comment on the latest court decision.