SEC Insider Trading Case Could Define the Crypto Industry
Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.
On July 21, the Securities and Exchange Commission (SEC) filed an insider trading charge against a former Coinbase employee and two additional plaintiffs. While this is not the first civil proceedings pursued by the SEC involving cryptocurrencies, it is the first time the language in the charges identify crypto assets explicitly as securities.
Currently there are two cases underway–that of the SEC and another through the Department of Justice (DOJ) headed by their Securities and Commodities Fraud Task Force. The investigation was led by agencies under the umbrella of the DOJ, including the Federal Bureau of Investigation (FBI) and the newly formed National Cryptocurrency Enforcement Team (NCET). The DOJ pursued charges for wire fraud and wire fraud conspiracy, having identified the referenced coins as “assets” rather than securities. The SEC aided in the DOJ investigation while conducting one of their own, concluding that the charges of insider trading involved “crypto asset securities.” This move was not received well by Coinbase, who cooperated with the investigation, or the Commodity Futures Trading Commision (CFTC), another agency contending for oversight of cryptocurrency and digital assets.
In her public statement released by the CFTC, Commissioner Caroline D. Pham called out the SEC for this bold move of “regulation by enforcement.” In the larger picture, Pham implies that the outcome of this case will decide the answer of “[m]ajor questions [that] are best addressed through a transparent process that engages the public to develop appropriate policy with expert input—through notice-and-comment rulemaking pursuant to the Administrative Procedure Act.” The Chief Legal Officer for Coinbase, Paul Grewal, had more to say in an open blog post immediately following the news of the charges.
Grewal mentions their cooperation with the investigation and points out how the SEC chose to deviate from the DOJ language purposefully in order to extend their jurisdiction over cryptocurrencies. Grewal establishes the SEC’s hypocrisy by referring to his company’s compliance with the agency concerning their coin listing analysis. He asserts that Coinbase analyzes potential coin listings through a rigorous process in order to avoid listing assets that could be considered a security, “a process that the SEC itself has reviewed.” “Instead of crafting tailored rules in an inclusive and transparent way, the SEC is relying on these types of one-off enforcement actions to try to bring all digital assets into its jurisdiction.”
Unlike other charges being pursued within the crypto space, the outcome of this case carries significant implications. Should the SEC win the case, regulatory oversight of the coins mentioned in the case, and perhaps others, will belong to the SEC until future legislation explicitly states otherwise. Legally speaking, the regulatory tug-of-war with the CFTC will be over. As Congress is unlikely to vote or pass any cryptocurrency bills before next year, the industry will need to be prepared for the regulatory agenda of the SEC and report to them accordingly.