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SEC Will Need to Prove Tokens Are Securities in Coinbase Insider Trading Case, Legal Expert Says

source-logo  coindesk.com 22 July 2022 19:23, UTC

The Securities and Exchange Commission (SEC) will need to prove the tokens listed on Coinbase (COIN) are in fact securities for it to pursue its current insider trading case against a former Coinbase product manager and his associates, according to a former persecutor.

Ian McGinley, currently a partner at international law firm Akin Gump Strauss Hauer & Feld, told CoinDesk TV’s “First Mover” that the government agency could not have filed the case unless the tokens in question are actually securities.

“They don’t have a wire fraud statute like the DOJ does,” McGinely said, referring to wire fraud charges issued by the U.S. Department of Justice (DOJ) on Thursday.

McGinley, who served more for more than a decade as an Assistant U.S. Attorney in the Southern District of New York (SDNY), noted the DOJ’s role gives them the ability to sidestep the debate of whether the tokens are securities or not.

“The SEC doesn’t have that option,” McGinley said. “They will have to prove that it's a security.”

The SEC’s charges followed a complaint issued by the DOJ on Thursday in which it alleged that Ishan Wahi, former product manager at Coinbase, engaged in wire fraud and wire fraud conspiracy. The charges allege that Wahi shared confidential Coinbase information to tip off his brother Nikil Wahi and Sameer Ramani about which crypto assets were scheduled to be listed on the cryptocurrency platform.

This prompted the SEC to bring forth charges against the trio based on the same allegations. For the first time, however, the SEC used the complaint to identify nine tokens as securities, without charging the issuers or exchanges issuing the digital assets.

McGinley notes that in this case, Coinbase is the victim “because it was their confidential information that was allegedly stolen.” Whether or not the crypto exchange will file to intervene as a witness has yet to be seen. “They’re not a party to this action. They haven’t been charged in either case,” McGinley said.

Coinbase could be walking a fine line, McGinley said. On one hand, the defendant violated the exchange’s confidentiality policy and in doing so, “they do not want employees [to be] able to do this.” On the other, the platform has responded to the case by saying that the tokens in question are not securities.

Generally, the SEC has brought enforcement actions against token issuers. In this case, questions of whether the issuers will have the opportunity to defend themselves remain unclear.

Coinbase most recently filed a petition to the SEC criticizing the current state of crypto regulation in the U.S., noting the “existing rules for securities just do not work for digital assets,” underscoring that without effective regulation, the U.S. would fall behind in digital asset innovation.

Whether Coinbase can be used as an example is still a gray area when it comes to regulation. “It really depends on the regulator,” McGinley said.

“This is the SEC saying, ‘we don’t need any new regulation here. A security token acts like a security, it walks like one, [and] we’re going to treat it like one for this insider trading case,’” McGinley said.

Read more: Ex-Coinbase Manager Among 3 Arrested on Crypto Insider Trading Charges

coindesk.com