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SEC Enforcement Case Labels Certain Cryptocurrency Tokens as Securities

In the long-running question of whether cryptocurrency tokens are securities, the Securities and Exchange Commission (the “SEC”) has launched new claims against a former employee of Coinbase Global, Inc. (“Coinbase”) , alleging insider trading in securities listed on the exchange. The SEC filed a complaint on July 21, 2022, alleging that the former employee and his brother and friend exchanged inside information regarding tokens about to be listed on the Coinbase exchange, one of the largest trading platforms. digital asset trading. SEC vs. Ishan Wahi, Nikhil Wahi and Sameer Ramani (“Wahi”). In the complaint, the SEC designates in particular certain investment contracts related to cryptocurrency as “crypto asset security” meeting the Howey test. Without the SEC’s interpretation of the tokens or contracts associated with the tokens as securities, the SEC would have no legal authority to bring an action alleging insider trading.

Before the filing of Wow, despite regulatory and industry requests for clarification, the SEC has made no direct statement as to whether cryptocurrency or tokens are “security.” The facts that (i) Coinbase asserts that no digital assets listed on its exchange are securities, and (ii) the issuance of a security requires, among other things, registration (or exemption from registration ) with the SEC prior to the offering and sale thereof, disclosure of material information to potential investors, and trading restrictions after issuance: requirements that Coinbase and issuers of tokens on the platform almost certainly didn’t think it applied to them.

Shortly after the lawsuit was filed, Coinbase Chief Legal Officer Paul Grewal came to his company’s vocal defense on Twitter, stating “Coinbase does not list securities. Period.” Grewal also posted an article on the company’s website, explaining that Coinbase has a review process to analyze each digital asset before listing it on the platform, “a process that the SEC itself examined”. Material to Coinbase, which was not named as a defendant in Wowif tokens traded on Coinbase are considered securities, the company could be accused of being an unlicensed broker, as a platform facilitating the exchange of securities must register with the SEC as a broker and comply with current reporting requirements.1

By making allegations designating digital assets on Coinbase as securities, the SEC has chosen a well-capitalized opponent. The issues raised are so fundamental to Coinbase’s underlying business that it will likely be a long time before this issue is resolved unless Congress acts in the meantime.

In a separate action, a federal grand jury indicted the same defendants. In the indictment, the U.S. Department of Justice (the “DOJ”) makes no allegation of violations of federal securities laws, but rather charges the defendants with wire fraud by effecting transactions using information confidential information from Coinbase on the cryptocurrencies that were planned to be listed. The fact that the DOJ chose wire fraud rather than securities fraud as the charged crime shows the uncertainty regarding the place of digital assets in the current regulatory framework.

As noted above, in categorizing the tokens as a security, the SEC complaint refers to the Howey test2, under which a digital asset, including a “cryptographic asset security” will be considered a security “if it constitutes an investment of money, in a common enterprise, with a reasonable expectation of profit from the efforts of ‘other’. The DOJ complaint alleges that “the defendants engaged in illegal transactions in at least twenty-five different crypto assets and made ill-gotten gains totaling approximately $1.5 million.” The SEC Complaint claims that at least nine of the 25 crypto assets were “crypto asset securities,” and therefore, the securities defendants’ insider trading fell within the “broad jurisdiction of the SEC to regulating securities markets and prosecuting violations of federal law. securities laws, including fraud and insider trading.

In particular, the SEC asserts that because the “securities were offered and sold by an issuer to raise funds that would be used for the business of the issuer” and that “the issuers and their promoters solicited investors by touting the potential of profits to be derived from investing in such securities based on the efforts of others” and made statements regarding “the ability of investors to engage in secondary trading of the token, as the success of the investment depends on the efforts management and others within the company”, the factors in the Howey test were satisfied and the nine chips in question are securities.

As a cautionary note to token developers and exchanges, the SEC in Wow pokes fun at issuers who “wrote ‘white papers’ describing the project and promoting the offering. . . made public statements on platforms such as Twitter, Medium and YouTube” and highlighted the “essential role that executives and other members of the company have played in making the company a success, thereby increasing the value of the security of cryptographic assets”. Due to these “representations by issuers and their management teams regarding the investment value of the tokens, the management efforts that contribute to the value of the tokens, and the availability of secondary markets to trade the tokens. . . a reasonable investor in the nine crypto asset securities would continue to look to the efforts of the issuer and its promoters, including their future efforts, to increase the value of their investment. At first glance, the characteristics of these communications and token offerings satisfy the Howey testand, depending on the judicial result, Wow may have broad implications for the future of digital token listings and offerings.

None of the issuers of the nine “crypto asset securities,” or Coinbase itself, is named as a defendant in Wow because it is a case of insider trading. Token issuers and exchanges should exercise caution, however, as the SEC’s position in Wow reiterates the SEC’s broad view of digital assets as securities and its ability to regulate them.


Manatt Phelps & Phillips, LLP, is a globally recognized law firm with top lawyers in the areas of blockchain, cryptocurrency, NFT, digital assets and tokens. We regularly advise our clients on the most effective routes to navigate state, federal, and international regulations to ensure compliance while promoting innovation and cutting-edge momentum across various industries. Our clients include token issuers, DAOs, blockchain intermediaries, layer 2 platform developers, fintech lenders and web3 investors.


1 This case also raises a public policy question about what to do when an employee takes action when their employer and a regulator disagree over the legal conclusion of the products being sold. To be liable for insider trading, the underlying tokens must be securities. Coinbase has always asserted that it is not a securities market, and it is possible that Wahi used this conclusion to inform its token trading practices. Perhaps expecting this argument of unfairness to be raised by the defense, the complaint notes that pre-announcement and pre-launch insider trading on the Coinbase platform is also prohibited by code. of conduct of Coinbase employees, regardless of the legal status of the tokens as securities.

2 Securities and Exchange Commission v WJ Howey Co., 328 US 293 (1946).


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