As the battle between the crypto industry and Gary Gensler’s Securities and Exchange Commission degeneratethe beleaguered industry has pinned its hopes of victory on an unexpected ally: Ishan Wahi, a former crypto exchange employee Coinbase WHO to plead guilty last month in what prosecutors described as the first case of cryptocurrency insider trading.
Wahi admitted to sharing his employer’s confidential information with his brother and friend to earn more than $1.5 million, and the crypto companies’ motives do not include clearing his name from his two chief executives. accusation of electronic fraud.
Instead, high-profile firms like Coinbase and venture capital firm Paradigm have sought to file “friend of the court” briefs in a separate SEC case against Wahi, where the agency is suing the ex-manager for insider trading in different crypto asset securities.
While Congress is still debating the future of crypto legislation, this vacuum has left regulators with a central question: which crypto assets are securities, under the SEC’s purview, and which are commodities, under the purview of the SEC. Commodity Futures Trading Commission?
Security vs Merchandise
Under Gensler, the SEC has taken an aggressive approach to crypto, filing numerous enforcement actions and Wells notices, or official Notice of Conclusion of Investigation, against companies such as Coinbase And kraken. At the heart of these accusations is the SEC’s belief that almost every cryptocurrency is a security and that some companies operate as unregistered stock exchanges and brokers.
The definition of a “security”, established by a 1946 Supreme Court case, determines whether a transaction is considered an “investment contract” – an investment of money in a joint venture with the expectation of profit from the efforts of others. Many in the crypto industry argue that most cryptocurrencies do not fall into this category, with Coinbase arguing that the more than 200 cryptocurrencies available on its platform are not securities.
As a manager at Coinbase, Wahi had early knowledge of the tokens Coinbase planned to list, sharing the information with his brother and friend to transact before they became available and take advantage of the ensuing bump. In its lawsuit against Wahi, the SEC argue he has jurisdiction because the cryptocurrencies that Wahi and his associates traded were all securities, including AMP, DDX, XYO, and RGT.
Wahi, represented by law firm Jones Day, sought to dismiss the case, arguing that all cryptocurrencies fail the Howey test and therefore fall outside the jurisdiction of the SEC. To do this, Wahi’s attorneys rely on the doctrine of “Major Questions,” a judicial principle that agencies such as the SEC should not be able to broadly interpret laws affected by economic matters. or major policies. Since Congress has yet to pass crypto legislation, their argument goes, the SEC should not be allowed to decide the new question of how to define a crypto asset.
“The SEC cannot use the term ‘investment contract’ as a blank check to be cashed whenever it seeks to expand its regulatory scope,” Wahi’s attorneys wrote in their motion to dismiss. . “And he cannot lay claim to the new and far-reaching digital asset industry without clear authorization from Congress.”
Although Gensler has repeatedly declared that almost all cryptocurrencies except Bitcoin fall under the definition of a security, the SEC has yet to argue the issue in court. Many in the crypto industry see Wahi’s civil case with the SEC — which is separate from his criminal case with the DOJ — as a way to challenge the agency’s interpretation.
Several groups have filed friends of court briefs supporting Wahi against the SEC, including two crypto trade groups, the Chamber of Digital Commerce and the Blockchain Association. On March 22, Wahi’s former employer, Coinbase, also submitted a request to file an amicus brief, and on Monday the judge also granted Paradigm lets file a brief.
“Because the SEC’s allegations in this case hinge on the agency’s erroneous assertion that Coinbase listed digital assets that are securities, Coinbase has a unique and compelling interest in explaining why the SEC is misinterpreting the laws. on Securities,” the company’s attorneys wrote in their statement. to the court.
Wahi is currently awaiting sentencing in his criminal case, and the outcome of the SEC case will not impact the outcome. THE the wall street journal reported Sunday that Coinbase was not funding its defense against the SEC, but its law firm would not share where the funding came from.