The institutionalization of cryptocurrencies continues apace.
The latest development: We learned that some alt-coins are securities, because you can get SEC charges for insider trading. (Criminal charges too, though that’s another matter.)
The United States Securities and Exchange Commission instructed a few guys to trade alt-coins before they were listed on Coinbase Global exchanges, which quite reliably caused the price of the coins to rise. And the U.S. attorney for the Southern District of New York is bringing criminal charges against the trio, saying the wire fraud charges are his “first” case as an insider trading tipster in the cryptocurrency markets. (Compare that with his “first-ever digital asset” insider trading case, where the guy with the inside information was trading alone.)
Ishan Wahi, a 32-year-old who was a product manager at Coinbase until May this year, is accused of sending coin listing advice to his brother Nikhil Wahi, 26, and a friend named Sameer Ramani, 33 years old. US authorities say in their complaints that the pair bought coins before the announcements and sold them after, usually at a profit.
None of this activity has come close to a gray area for Coinbase, as complaints indicate that employees were repeatedly told that this type of trading and disclosure was not permitted. From the SEC Complaint:
At all relevant times, Coinbase’s employee policies stated that “material nonpublic information” included “information about a decision by Coinbase to list, not to list, or add features to a digital asset.” [separately defined to include tokens].” The policies further emphasized that Coinbase employees should never disclose material, non-public information to anyone, including family and friends, or give advice to others who may make a business decision. using this material, non-public information.
But the reach of the SEC doesn’t stretch as far as you might think.
While the trio reportedly traded 25 tokens prior to their listing announcements, the SEC only claims that nine of them were securities. Also from the SEC complaint, with our emphasis:
Throughout the reporting period, Nikhil and Ramani repeatedly traded ahead of Coinbase listing announcements, trading at least 25 tokens. . . this repeated pattern of Ishan tipping Nikhil and Ramani with inside information, followed by Nikhil and Ramani trading on that information, including trading in at least nine crypto asset securitiesthat appeared in seven of those ads.
These tokens are: Amp, Rally, DerivaDAO, XYO, Rari Governance Token, LCX, Powerledger, DFX Finance and Kromatica.
This brings us back to our old friend the Howey test. As we learned from the DAO and our Alphachain project, this test creates a few standards that a token must meet before it can be considered a security.
In other words, kudos to the folks running AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, and KROM! The SEC says it’s reasonable for investors to expect to make money based on your management efforts. You were able to list a stock without the complicated IPO process!
Does this mean that these exchanges would be allowed in tokens that are not securities?
Well, there’s a big reason why that’s a bad idea: the Justice Department filing doesn’t include any arguments about the regulatory status of the tokens at all, because as we all know, the accusations wire fraud cover a wide range of financial crimes.
So, if you are trying to pull off this type of scheme*, you will need to avoid communicating with anyone electronically in interstate or foreign commerce, while using the Coinbase online digital asset trading platform, which has offices in Chicago, New York, Portland, London, Dublin and Tokyo.
You also probably wouldn’t want to use a foreign phone as an alleged means of evading the attention of US authorities. Or allegedly trying to flee the country when you think you’re about to get in trouble. From the filing, with our emphasis:
Ishan has repeatedly given his brother, Nikhil, and his close friend, Ramani, material, non-public information about the timing and content of these announcements. Ishan communicated by phone and text message with Nikhil and Ramani in 2021 and 2022, including exchanging phone calls and messages with the two that would not be recorded in U.S. phone company records because, among other things, Ishan was using a phone with a non-U.S. phone number (the “foreign phone”). For example, on October 20, 2021, the same day as a Coinbase listing announcement, Nikhil sent Ishan’s foreign phone a dollar sign and eyes emoji: “$👀👀”. . . .
Nikhil and Ramani’s suspicious dealings have drawn attention. On May 11, 2022, Coinbase’s Director of Security Operations emailed Ishan to schedule an interview with Coinbase’s Legal Department as part of an “ongoing investigation by the company into the listing process. Coinbase assets”. Ishan – using the foreign phone – then sent a screenshot of the interview request to Nikhil and Ramani, and said he needed to talk to them urgently. On Monday May 16 – the day of his scheduled interview – Ishan emailed his colleagues that he would be “out indefinitely” because he “had to return to India overnight”. Ishan failed to show up for his scheduled interview, but was prevented from leaving the country by law enforcement. Using the foreign phone, Ishan tried to call both Nikhil and Ramani several times on May 16.
*Please, do not do that.