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US Judge Backs SEC: Trading of Certain Cryptocurrencies on Secondary Markets Are Securities Transactions

US Judge Backs SEC: Trading of Certain Cryptocurrencies on Secondary Markets Are Securities TransactionsA U.S. district judge has sided with the Securities and Exchange Commission (SEC) in a ruling that declares the trading of certain crypto assets on secondary markets to be securities transactions. This decision emerged from an insider trading case involving crypto exchange Coinbase’s former product manager Ishan Wahi, his brother Nikhil Wahi, and their friend […]

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Trade group accuses SEC of ‘stealthy’ overreach in Coinbase insider trading case

The Chamber of Digital Commerce has accused the SEC of trying to impose securities regulations via the “back door” of an insider trading lawsuit.

The United States Securities and Exchange Commission has again been accused of overstepping its authority and unfairly labeling crypto assets as securities, this time in its insider trading case against ex-Coinbase employees.

In an amicus brief filing on Feb. 22, the U.S.-based Chamber of Digital Commerce argued the case should be dismissed as it represented an expansion of the SEC’s “regulation by enforcement” campaign and seeks to characterize secondary market transactions as securities transactions.

“This case represents a stealthy, yet dramatic and unprecedented effort to expand the SEC’s jurisdictional reach and threatens the health of the U.S. marketplace for digital assets,” wrote Perianne Boring, founder and CEO of the Chamber of Digital Commerce.

The Chamber highlighted the “SEC’s encroachment into the digital assets market” was never authorized by Congress, and noted in other Supreme Court cases it has been ruled that regulators must first be granted authority by Congress.

“By acting without Congressional authorization, [the SEC] continues to contribute to a chaotic regulatory environment, harming the very investors it is charged to protect,” it wrote on Twitter.

The Chamber also argued that in bringing claims of securities fraud, the SEC was essentially asking the court to uphold that secondary market trades in the nine digital assets mentioned in an insider trading case against a former Coinbase employee constitute securities transactions, which it suggested was “problematic.”

“We have serious concerns about [the SEC’s] attempt to label these tokens as securities in the context of an enforcement action against third parties who had nothing to do with creating, distributing or marketing those assets,” Perianne added.

The Chamber cited the LBRY v SEC case in its brief, in which the judge had ruled that secondary market transactions would not be designated as securities transactions.

The judge had been persuaded by a paper from commercial contract attorney Lewis Cohen, which pointed out that no court had ever acknowledged the underlying asset was a security at any point since the landmark SEC v W. J. Howey Co. ruling — a case which set the precedent for determining whether a security transaction exists.

The latest amicus brief follows a similar filing from advocacy group the Blockchain Association on Feb. 13, which also argued that the SEC had exceeded its authority in the case and claimed it was “the latest salvo in the SEC’s apparent ongoing strategy of regulation by enforcement in the digital assets space.”

Related: Gary Gensler’s SEC is playing a game, but not the one you think

An amicus brief is filed by an amicus curiae, or “friend of the court,” which is an individual or organization not involved with a case but can assist the court by offering relevant information or insight.

The SEC in July sued former Coinbase Global product manager Ishan Wahi, brother Nikhil Wahi, and associate Sameer Ramani, alleging that the trio had used confidential information obtained by Ishan to make $1.5 million in gains from trading 25 different cryptocurrencies.

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Former Coinbase manager slams SEC in motion to dismiss insider trading case

The attorneys for brothers Ishan and Nikhil Wahi want the case thrown out, arguing that the Securities and Exchange Commission was wrong when it charged the pair.

A former product manager at cryptocurrency exchange Coinbase has moved to dismiss charges of alleged insider trading, with his lawyers arguing the tokens he allegedly traded were not securities.

Lawyers representing ex-Coinbase employee, Ishan Wahi, and his brother, Nikhil Wahi, filed a motion on Feb. 6 in the United States District Court for the Western District of Washington to dismiss charges laid by the Securities and Exchange Commission.

The SEC charged the brothers and their associate, Sameer Ramani, with insider trading last July, alleging the trio made $1.1 million using Ishan’s tips on the timing and names of tokens in upcoming Coinbase listings.

In an over 80 page document, the lawyers outlined how the SEC was “wrong” in its charges.

They argued the cryptocurrencies allegedly traded by the Wahi’s did not fit the legal definition of a security, as they had no “investment contract [...] Written or implied,” comparing them instead to baseball trading cards and beanie babies.

Lawyers for the Wahi brothers argued the tokens allegedly purchased by the pair are akin to physical baseball cards, such as those pictured, which can sell for thousands. Source: Twitter

They argued that token developers have “no obligations whatsoever” to buyers on the secondary markets, adding:

“With zero contractual relationship, there cannot be an ‘investment contract.’ It is that simple.”

The tokens, the lawyers argued, were also all utility tokens. They emphasized the tokens’ primary use is on a platform rather than as investment products.

“None of the tokens were like stock [...] The very object of each token was to facilitate activity on the underlying platforms and, in so doing, enable each network to develop and grow.”

The Wahi brothers and Ramani purportedly purchased at least 25 cryptocurrencies before the Coinbase listings — of which at least nine the SEC asserts are securities — before selling them for a profit shortly after their listing.

Lawyers slam SEC for regulatory muscling

The Wahi’s lawyers lambasted the SEC for its apparent attempt at “trying to seize broad regulatory jurisdiction over a massive new industry via an enforcement action.”

They said that the regulator “lacks clear congressional authorization to deem the tokens at issue to be ‘securities,’” adding:

“If the SEC really believes digital assets are securities, it should engage in a rulemaking or other public proceeding explicating that view and providing guidance to regulated parties on its implications.”

Commodity Futures Trading Commission Commissioner Caroline Pham has previously expressed concern at the possible “broad implications” of the case.

Related: Did dYdX violate the law by changing its tokenomics?

She said the SEC’s actions don’t address the question of whether some cryptocurrencies are securities through a “transparent” process that develops “appropriate policy with expert input.”

The Wahi brothers and Ramani also faced charges from the U.S. Attorney’s Office for the Southern District of New York relating to wire fraud and wire fraud conspiracy.

Nikhil pleaded guilty to the charges and was sentenced to 10 months in prison for wire fraud conspiracy in January. Ishan pleaded not guilty to the charges in August. Ramani seemingly remains at large.

The motion was signed by 10 attorneys from five separate law firms.

If the motion to dismiss is denied by District Judge Tana Lin, the case will continue.

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