- Jul 27, 2015
If you have paid casual attention to crypto news over the past few years, you probably have a sense that the crypto market is unregulated—a tech-driven Wild West in which the rules of traditional finance do not apply. If you were Ishan Wahi, however, you would probably not have that sense.
Wahi worked at Coinbase, a leading crypto exchange, where he had a view into which tokens the platform planned to list for trading—an event that causes those assets to spike in value. According to the US Department of Justice, Wahi used that knowledge to buy those assets before the listings, then sell them for big profits. In July, the DOJ announced that it had indicted Wahi, along with two associates, in what it billed as the “first ever cryptocurrency insider trading tipping scheme.” If convicted, the defendants could face decades in federal prison. On the same day as the DOJ announcement, the Securities and Exchange Commission made its own. It, too, was filing a lawsuit against the three men. Unlike the DOJ, however, the SEC can’t bring criminal cases, only civil ones. And yet it’s the SEC’s civil lawsuit—not the DOJ’s criminal case—that struck panic into the heart of the crypto industry. That’s because the SEC accused Wahi not only of insider trading, but also of securities fraud, arguing that nine of the assets he traded count as securities.
This may sound like a dry, technical distinction. In fact, whether a crypto asset should be classified as a security is a massive, possibly existential issue for the crypto industry. The Securities and Exchange Act of 1933 requires anyone who issues a security to register with the SEC, complying with extensive disclosure rules. If they don’t, they can face devastating legal liability.
Over the next few years, we’ll find out just how many crypto entrepreneurs have exposed themselves to that legal risk. Gary Gensler, whom Joe Biden appointed to chair the SEC, has for years made clear that he believes most crypto assets qualify as securities. His agency is now putting that belief into practice. Apart from the insider trading lawsuit, the SEC is preparing to go to trial against Ripple, the company behind the popular XRP token. And it is investigating Coinbase itself for allegedly listing unregistered securities. That’s on top of a class-action lawsuit against the company brought by private plaintiffs. If these cases succeed, the days of the crypto free-for-all could soon be over.