As the battle between the crypto industry and Gary Gensler’s Securities and Exchange Commission escalates, the embattled sector has poured its hopes for victory into an unexpected ally: Ishan Wahi, a former employee of the crypto exchange Coinbase who pled guilty last month in what prosecutors described as the first cryptocurrency insider trading case.
Wahi admitted to sharing confidential information from his employer with his brother and friend to net more than $1.5 million, and crypto companies’ motivations do not include clearing his name of his two counts of wire fraud.
Instead, top firms like Coinbase and the VC firm Paradigm have sought to file “friend of the court” briefs in a separate case by the SEC against Wahi, where the agency is suing the ex-manager for insider trading in different crypto asset securities.
With Congress still debating the future of crypto legislation, that vacuum has left a central question for regulators: Which crypto assets are securities, under the purview of the SEC, and which are commodities, under the Commodity Futures Trading Commission?
Security vs. commodity
Under Gensler, the SEC has taken an aggressive approach toward crypto, filing numerous enforcement actions and Wells Notices, or formal notice of an investigation’s conclusion, against companies including Coinbase and Kraken. At the core of these charges is the SEC’s belief that nearly every cryptocurrency is a security, and that certain firms are operating as unregistered securities exchanges and broker-dealers.
The definition of a “security,” established by a 1946 Supreme Court case, determines whether a transaction is deemed an “investment contract”—an investment of money in a common enterprise with the expectation of profit derived from the efforts of others. Many in the crypto industry hold firm that most cryptocurrencies do not fall into this category, with Coinbase arguing that the more than 200 cryptocurrencies available on its platform are not securities.
As a manager at Coinbase, Wahi had early knowledge of which tokens Coinbase planned to list, sharing the information with his brother and friend to make trades ahead of their availability and profit from the ensuing bump. In its case against Wahi, the SEC argues it has jurisdiction because the cryptocurrencies that Wahi and his associates traded were all securities, including AMP, DDX, XYO, and RGT.
Wahi, represented by the law firm Jones Day, has sought to dismiss the case, arguing that all of the cryptocurrencies fail the Howey Test and therefore fall outside the SEC’s jurisdiction. To do so, Wahi’s lawyers rely on the “Major Questions” doctrine, a judicial principle that argues that agencies such as the SEC should not be able to broadly interpret statutes concerned with major economic or political issues. Because Congress has yet to pass crypto legislation, their argument goes, the SEC should not be allowed to decide the novel question of how to define a crypto asset.
“The SEC may not use the phrase ‘investment contract’ as a blank check to cash whenever it seeks to expand its regulatory ambit,” Wahi’s lawyers wrote in their motion to dismiss. “And it may not lay claim over the novel and far-reaching digital asset industry without clear congressional authorization.”
Although Gensler has repeatedly stated that nearly every cryptocurrency, with the exception of Bitcoin, falls under the definition of a security, the SEC has yet to litigate the issue in court. Many in the crypto industry view Wahi’s civil case with the SEC—which is separate from his criminal case with the DOJ—as a vehicle for challenging the agency’s interpretation.
Several groups have filed friend-of-the-court briefs in support of Wahi against the SEC, including two crypto trade groups, the Digital Chamber of Commerce and the Blockchain Association. On March 22, Wahi’s former employer, Coinbase, also submitted a request to file an amicus brief, and on Monday the judge also granted Paradigm leave to file a brief.
“Because the SEC’s allegations in this case hinge on the agency’s erroneous contention that Coinbase has listed digital assets that are securities, Coinbase has a unique and compelling interest in explaining why the SEC is misreading the securities laws,” the company’s lawyers wrote in their statement to the court.
Wahi is currently awaiting sentencing in his criminal case, and the outcome of the SEC case will not impact the outcome. The Wall Street Journal reported on Sunday that Coinbase was not funding his defense against the SEC, but his law firm would not share where the financing is coming from.