SEC labels 9 tokens as securities in Coinbase insider trading scandal

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U.S. authorities have charged a former Coinbase (NASDAQ: COIN) product manager with using insider information to trade ahead of new token listings on the controversial cryptocurrency exchange.

On Thursday, the U.S. Securities and Exchange Commission (SEC) announced that it had filed insider trading charges against former Coinbase exec Ishan Wahi, his brother Nikhil Wahi and his friend Sameer Ramani. The trio is accused of violating securities laws’ antifraud provisions to earn over $1.1 million in illegal profits between June 2021 and April 2022.

As part of his Coinbase duties, Ishan Wahi allegedly “helped to coordinate the platform’s public listing announcements that included what crypto assets or tokens would be made available for trading.” The other two accused used this knowledge to purchase “at least 25 crypto assets, at least nine of which were securities, and then typically sold them shortly after the announcements for a profit.”

In addition to the SEC’s civil action, the U.S. Attorney’s Office for the Southern District of New York brought criminal charges against the trio. The inside dealers are charged with wire fraud conspiracy and wire fraud. The DOJ says the trio—the Wahi brothers are in custody, but Ramani remains at large—netted $1.5 million in ill-gotten gains (no explanation was given for the $400,000 discrepancy with the SEC’s claims).

The DOJ says Ishan Wahi was a member of a private Coinbase messaging channel for staff directly involved in the asset listing process. After relaying insider info to his brother and Ramani, the latter pair used multiple anonymous Ethereum wallets to purchase “large quantities” of specific tokens, including “at least six” of the assets included in Coinbase’s April 11, 2022 listing announcement.

On April 12, Twitter user Cobie claimed to have found data showing an Ethereum wallet that “bought hundreds of thousands of dollars of tokens” ahead of the April listing. Coinbase’s official Twitter account belatedly leaped into action, claiming to be on the hunt.

On May 11, Coinbase’s director of security emailed Ishan Wahi, summoning him to an in-person meeting on May 16. Ishan said he’d be there, but on May 15, he purchased a one-way airline ticket to India and texted his accomplices to warn them that the jig was up. Unfortunately for Ishan, he was arrested before he could board his flight.

U.S. Attorney Damian Williams, who last month brought the first insider trading charges involving NFTs, said this latest case should send a message that “fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street.”

Garbage in, garbage out

Williams thanked Coinbase for “its cooperation with the investigation.” Coinbase CEO Brian Armstrong was quick to take a victory lap, tweeting that the company had “received information about possible frontrunning of assets” and a subsequent investigation “identified 3 suspects and provided this information to law enforcement.”

1/ At Coinbase, we actively monitor for illegal activity and investigate any alleged misconduct. In April, we received information about possible frontrunning of assets shortly before being listed on Coinbase. We immediately launched an investigation into this.

— Brian Armstrong (@brian_armstrong) July 21, 2022

However belatedly proactive Coinbase may have been in this situation, they could have avoided any kerfuffle simply by refusing to list utility-free shitcoins that happen to be unregistered securities serving no other purpose beyond vehicles for rampant speculation. But with ‘crypto winter’ putting a big chill on retail investors’ enthusiasm and Coinbase reportedly dealing with liquidity issues, well, smoke ‘em if you got ‘em. (Particularly if the exchange has an undisclosed financial interest in the tokens it lists.)

Of course, Coinbase is also dancing to the tune played by its VC masters, including Andreessen Horowitz (a16z), who continue to raise billions to invest in sketchy Web3 projects, each of which requires a bespoke token, many of which ultimately end up being listed/pumped/dumped on Coinbase and then never heard from again.

Coinbase shares closed just under $74 on July 21, about $20 better than it was worth last week but still barely one-fifth of their value last November. Coinbase will report its Q2 financials on August 9. Investors will be on tenterhooks to see if the company posts a net loss even bigger than the $430 million deficit it reported in Q1.

These aren’t the securities you’re looking for

Earlier this week, SEC director of enforcement Gubir Grewal was challenged by a congressional subcommittee on why, if the SEC was convinced that most digital currency tokens were securities, the regulator wasn’t getting tougher with exchanges like Coinbase for facilitating trades of unregulated securities.

As if on cue, Coinbase published a series of blog posts Thursday, including one detailing a petition the company filed “asking the SEC to begin rulemaking on digital asset securities.” The company wants this to include public input rather than relying on “arbitrary enforcement or guidance developed behind closed doors.” (Coinbase claims this petition was filed “with no prior knowledge of the timing” of the insider trading charges.)

Coinbase has long displayed a fact-free, tone-deaf approach to dealing with regulators, including accusing the SEC of “really sketchy behavior” because they rejected Coinbase’s sketchy Lend product. Coinbase’s chief legal officer Paul Grewal followed this up by displaying a level of ignorance regarding U.S. securities laws that is seriously unbefitting someone in his role.

In response to the SEC applying the ‘securities’ definition to nine of the tokens involved in the insider trading ring, Grewal doubled down on his know-nothing status by authoring a blog post titled “Coinbase does not list securities. End of story.” It’s never quite explained in the post how Grewal arrived at this emphatic point, other than saying Coinbase has “a rigorous process to analyze and review each digital asset before making it available on our exchange.” (You mean more rigorous than you applied to the Lend debacle? Our mistake, then. Carry on.)

The SEC’s Gurbir Grewal (no relation to Coinbase’s Paul, presumably) said the regulator was “not concerned with labels, but rather the economic realities of an offering. In this case, those realities affirm that a number of the crypto assets at issue were securities.” For the record, the tokens in question are AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, and KROM.

Coinbase found an ally in the Commodity Futures Trading Commission (CFTC) commissioner Caroline Pham, who issued a statement on Thursday decrying “regulation by enforcement” and warning that “the SEC’s allegations could have broad implications beyond this single case.”

The CFTC is in a regulatory turf war with the SEC over digital assets, with many high-profile ‘crypto bros’ favoring the underfunded CFTC as their overseer, presumably because they’d be able to get away with a lot more shady crap while being guarded by a Chihuahua than by a Doberman.

Regardless, Coinbase needs to get its token-listing house in order because the current system is a dog that just won’t hunt. As the original insider trading sleuth put it today, “$1.5m in frontrunning stolen by some staff member over the course of a year is barely a speck of dust compared to the damage done by prior incompetence at CB.”

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.