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A federal judge in a landmark ruling supports the Securities and Exchange Commission’s (SEC) position that certain crypto assets are securities even when traded on secondary markets.
A March 1 judgment in the SEC case against a former Coinbase staffer for insider trading has added another dimension to the ongoing debate about how to categorize crypto assets.
The SEC’s case introduced a unique complexity to the already gloomy crypto regulatory landscape in the U.S., as it involves individuals accused of insider trading rather than crypto firms themselves.
Ishan Wahi, a former Coinbase employee, was found to have shared confidential information with his brother Nikhil Wahi and friend Sameer Ramani, who remains at large. The SEC argues that the defendants traded unregistered securities on Coinbase, specifically little-known tokens like AMP and DDX.
Wahi and his brother previously settled with the SEC and the Department Of Justice (DOJ), avoiding the risk of a judge ruling on the security status of the tokens. However, Ramani’s unavailability has given the lawsuit a new twist, leading to a default judgment by Judge Tana Lin of the United States District Court for the Western District of Washington.
The ruling declared every crypto asset Ramani traded on Coinbase as an investment contract, even in secondary transactions.
The “Howey Test” used by the SEC dates back to a 1946 case before the Supreme Court that dealt with selling plots in citrus groves. This test provides four factors under which a financial instrument can be considered as a security. It remains prevalent in determining whether virtual money is actually securities or not.
Though Bitcoin has enjoyed regulatory clarity since being labelled as a commodity in 2015, other cryptocurrencies remain undefined, posing real regulatory and legal threats to centralized exchanges.
Under chairpersons Jay Clayton and Gary Gensler, the U.S. SEC has increased its enforcement activities against cryptocurrency companies accusing them of issuing unregistered securities or selling them. As there is no significant progress in legislation regarding this matter, industry leaders like Ripple, Binance, and Coinbase have been put on the hot seat by the regulator in recent times.
U.S. Federal judges have provided differing perspectives on the securities question, adding to regulatory uncertainty.
In a notable ruling last year, Judge Analisa Torres of the U.S. District Court for the Southern District of New York held that direct sales of Ripple’s XRP token to institutional investors constituted unregistered securities, while secondary sales on exchanges did not. However, Judge Jed Rakoff disagreed with this approach, emphasizing that a distinction based on the manner of sale was unwarranted.
This complexity is amplified in lawsuits against major crypto exchanges, Coinbase and Binance, where the focus lies solely on token trading on their platforms. The judges are yet to rule on motions by these exchanges, adding suspense to an already intricate legal landscape.