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The Blockchain Association (BA) filed an amicus brief in the ongoing Coinbase Insider Trading case on Feb. 13, alleging that the SEC improperly classified the tokens as securities — and denied its creators an opportunity to defend themselves.
“In this action, in particular, the SEC is engaging in regulation by enforcement against absent third parties. And the original creators of those tokens have no practical ability to be heard on the subject.”
The U.S. Securities Exchange Commission (SEC) charged a former Coinbase Product manager Ishan Wahi and his brother Nikhil Wahi for insider trading and securities fraud in July 2022. The brothers were accused of using insider information from Coinbase to profit roughly $1.5 million.
After about eight months of legal battles, the Wahi brothers pleaded guilty to the insider trading charges. However, Ishan pleaded not guilty to the securities fraud charges.
Ishan argued that the named tokens (AMP, XYO, LCX, POWR, RLY, RGT, DDX, DFX, and KROM) are not investment contracts, given that there is no contractual agreement between the developers and token holders.
SEC enforced rules without process
The BA argued that the SEC failed to engage with the public on rulemaking but enforced its rules without due process. As a result, the SEC’s action is considered a violation of the Administrative Procedure Act.
For the SEC to succeed in its enforcement action against Wahi, the Association said that the court has to engage in “9 mini-trials” to prove the named tokens are securities.