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Digital asset trade group urges court to dismiss Coinbase insider trading case

The Chamber of Digital Commerce waded into the case of the former Coinbase (NASDAQ: COIN) employee accused of insider trading, calling the U.S. Securities and Exchange Commission’s (SEC) action a “stealth attempt” to expand the agency’s reach.

The digital asset trade association urged a district court in Washington to dismiss a case brought by the U.S. securities regulator against an ex-Coinbase employee and two associates accused of insider trading, arguing the case unfairly labeled several crypto assets as securities.

The Chamber of Digital Commerce, which is a self-described not-for-profit organization and “world’s largest digital asset and blockchain trade association,” filed an amicus curiae brief questioning whether secondary market trades of digital assets should be considered securities transactions within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, and accusing the SEC of overreach.

An amicus curiae, or “friend of the court,” brief is a document submitted to the court in which a person or organization not named in the case, but with a vested interest in the outcome, can set out legal arguments and recommendations.

Following in the footsteps of the Blockchain Association, which filed an amicus brief earlier this month objecting to the case, the Chamber’s filing focuses on the issue of the regulator’s jurisdictional legitimacy and raises concerns that:

“Should the SEC’s novel approach in this case become routine (and the SEC has already brought a similar action involving different digital assets), it would have profoundly negative repercussions for the market as a whole—including many of the Chamber’s members—and would exacerbate both the current regulatory uncertainty and the accompanying flight of blockchain innovators to foreign jurisdictions.”

A landmark case

The SEC brought charges in July against Ishan Wahi, a former product manager at Coinbase, his brother Nikhil Wahi, and their friend Sameer Ramani, accusing the trio of violating securities law antifraud provisions between June 2021 and April 2022 to earn over $1.1 million in illegal profits, by purchasing and selling at least 25 ‘crypto’ assets based on insider knowledge.

Crucially, the agency identified nine of these assets as securities.

Federal prosecutors also brought criminal charges against the Wahi brothers and Ramani, charging the defendants with wire fraud in the first-ever insider trading case involving digital assets. On February 7, Ishan Wahi pleaded guilty to two counts of conspiracy to commit wire fraud.

Lawyers for the Wahi brothers filed a motion earlier this month accusing the SEC of “trying to seize broad regulatory jurisdiction over a massive new industry via an enforcement action against a 32-year-old former Coinbase employee and his kid brother.”

The attorneys for the defendants contested the SEC claim that nine of the assets in question met the Howey test for identifying a security, suggesting the Howey’ investment contract’ stipulation doesn’t apply because “here there are no contracts, written or implied” and that “with zero contractual relationship, there cannot be an ‘investment contract.'”

The objections keep coming

The Chamber of Digital Commerce’s brief is based on three key points:

  • First, it claimed the SEC has never clearly defined what sorts of digital asset transactions it deems to be securities transactions.
  • Second, it suggested that the SEC’s “attempt to obtain a ruling that these digital assets transactions constitute securities through the ‘back door’ of an insider trading action threatens a host of collateral consequences.” 
  • Third, it argued that the SEC lacks the statutory authority to bring this action at all.

In its brief, the organization also laid out its credentials for why it is qualified to weigh in on the case, highlighting that its team includes “industry pioneers, former regulators, two former Chairs and a Commissioner of the U.S. Commodity Futures Trading Commission (“CFTC”), and a former Commissioner of the SEC.”

The SEC has yet to respond to these objections, but it has previously warned that tokens spawned from initial coin offerings (ICOs) likely qualify as securities offerings that require registration.

The regulator’s original complaint also pre-emptively addressed some of these objections, perhaps envisioning the resistance it would face when identifying some of the assets as securities. It stated:

“Investors were told, explicitly or implicitly, that they could sell their securities in the secondary markets and that the liquidity available in the secondary markets could drive up the value of their crypto asset securities … each of the nine companies invited people to invest on the promise that it would expend future efforts to improve the value of their investment.”

The SEC offered examples of this ‘shilling‘ for each of the nine tokens that it claims as securities.

Jurisdictional wrangling

If the court was to entertain the objection that the SEC has overreached and the matter in question does not, in fact, involve what could be described as ‘securities,’ it would set a different kind of precedent, one that suggests a further limiting of the SEC’s role in the digital asset space.

The upcoming Digital Commodities Consumer Protection Act (DCCPA), if and when it eventually passes through congress into law, would give the Commodity Futures Trading Commission (CFTC) exclusive jurisdiction over digital commodities trading, including spot markets.

Hopefully, this will clear up some of the jurisdictional ambiguity that has hampered effective enforcement of the digital asset space and encourages the kind of challenge to cases that the Blockchain Association and Chamber of Digital Commerce have lodged in the Coinbase insider trading matter.

Favoring the argument that the SEC does not have jurisdiction, in this case, could put the ball in the CFTC’s court, something detractors of the SEC’s regulation-by-enforcement approach might cheer in the short term. However, it could end up being a case of ‘be careful what you wish for,’ as the CTFC has proved itself to be no shrinking violet regarding digital asset enforcement.

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