In the long-running question of whether cryptocurrency tokens are securities, the Securities and Exchange Commission (“SEC”) has issued a request to former employees of Coinbase Global, Inc. (“Coinbase”) to exchange. SEC filed a lawsuit On July 21, 2022, a former employee, his brother and a friend claimed to have traded inside information about a token about to be listed on Coinbase Exchange, one of the largest digital asset trading platforms. SEC v. Ishan Wahi, Nikhil Wahi, Sameer Ramani (“wahi”). In its complaint, the SEC specifically refers to certain cryptocurrencies as “crypto-asset security,” including cryptocurrencies, virtual currencies, digital coins, and tokens listed on Coinbase and issued using blockchain technology. or certain digital assets transferred are considered “security” under federal securities laws. Unless the SEC interprets the tokens as securities, the SEC has no legal authority to assert insider trading.
before submission Wahi, despite industry demands for rulemaking and clarification, the SEC has not made a direct statement on whether cryptocurrencies or tokens are “security”. ) Coinbase claims that digital assets listed on its exchanges are not securities; and (ii) the issuance of securities requires registration (or exemption) is required. Disclosure of Material Information to Potential Investors, and Post-Issuance Trading Restrictions: A requirement that Coinbase and issuers of tokens on the platform have almost certainly not paid attention to.
Shortly after the lawsuit was filed, Coinbase Chief Legal Officer Paul Grewal said: twitter“Coinbase does not list any securities. company website, explains that Coinbase has a review process that analyzes each digital asset before listing it on its platform, “a process reviewed by the SEC itself.” important for Coinbase, which was not named as a defendant in the WahiIf the tokens traded on Coinbase were deemed to be securities, the company would be unlicensed as the platform facilitating the exchange of securities would be required to register with the SEC as a broker-dealer and comply with ongoing reporting requirements. could be charged with being a broker-dealer of1
By filing a complaint against Coinbase, the SEC has chosen a well-capitalized adversary. The issues raised are so fundamental to the underlying business of Coinbase that it is likely that it will take a long time for the parties to resolve them or for this issue to be clarified. Congress will not act during that time.
In a separate complaint against the defendants of Wahi Filed by the U.S. Department of Justice (“DOJ”) on the same day, DOJ did not file a federal securities law violation allegation and instead used Coinbase’s confidential information to transact cryptocurrency destined transactions. Defendant is charged with fraudulent wire fraud. list. This discrepancy between DOJ and SEC claims is an example of the lack of uniformity regarding regulation and enforcement of digital assets in the Web3 era.
In classifying tokens as security, the SEC complaint states: howie test2, a digital asset, including “crypto-asset security”, is defined as security and security “if it constitutes an investment of money in a general enterprise with a reasonable expectation of profit from the efforts of others”. considered. DOJ’s complaint alleges that “Defendants engaged in illicit trading in at least 25 different crypto assets and realized illicit gains totaling approximately $1.5 million.” The SEC complaint states that at least 9 out of 25 crypto assets are “crypto assets securities,” and therefore insider trading of the defendants’ securities constitutes a lawsuit against the SEC for “regulating the securities market and violating federal law.” It is within the broad jurisdiction of the cause.” Securities law, including fraud and insider trading. ”
In particular, the SEC said that “the securities were offered and sold by the issuer to raise funds to be used in the issuer’s business” and that “the issuer and its promoters are entitled We enticed investors by advertising the possibilities.” Investing in these securities based on the efforts of others,” he said, adding, “The ability of investors to engage in secondary trading of the tokens. The success of the investment depends on the efforts of the company’s management and others.” said.of howie test The nine tokens in question are securities.
As a reminder to token developers and exchange platforms, the SEC Wahi It disrespects publishers who have written “white papers” that describe the project and facilitate its offering. . emphasized role. for these “representations by the Issuer and its management team regarding the investment value of the Tokens, the management efforts that contribute to the value of the Tokens, and the availability of a secondary market for trading the Tokens.” . . reasonable investors in the nine cryptocurrency securities will continue to look to the efforts of issuers and their promoters, including future endeavors, to increase investment value. At face value, these offering communications and token characteristics are howie testand, depending on the judicial outcome, Wahi It could have far-reaching implications for the future of digital token listings and offerings.
Interestingly, none of the nine “crypto asset securities” or Coinbase is named as a defendant. WahiAccordingly, there is no judicial position to challenge the SEC’s allegations. However, token issuers and exchanges need to be careful. Wahi Strongly hints at potential future regulatory and enforcement actions against issuers and exchanges of digital assets.
Manatt Phelps & Phillips, LLP is a globally recognized law firm with leading attorneys in the blockchain, cryptocurrency, NFT, digital assets and token practice areas. We regularly advise our clients on the most efficient route to navigate state, federal, and international regulations, ensuring compliance while driving innovation and leading-edge momentum across a variety of industries. promote. Our clients include token issuers, DAOs, blockchain intermediaries, layer 2 platform developers, fintech lenders and his Web3 investors.
1 The case also raises public policy questions about what to do if an employee takes action when employers and regulators are at odds over the legal consequences of a product being sold. To be liable for insider trading, the underlying token must be a security. Coinbase has always claimed that it does not form a market for securities, and it is possible that Wahi used that conclusion to inform its token trading practices. You may expect this unfair argument to be brought up by the defense, and the complaint states that, regardless of the legal status of the token, the code of conduct for Coinbase employees will dictate that the Coinbase platform It also points out that insider trading of tokens prior to the announcement and launch of is also prohibited. Securities.
2 Securities and Exchange Commission v. WJ Howey Co., 328 US 293 (1946).