Coinbase vs. The SEC

Coinbase is having one helluva week with our not-so-friendly regulators, stirring up a fair share of drama in the process.

The bad news all started with the SEC announcing insider trading charges against a former Coinbase product manager, Ishan Wahi, his brother and his friend last Thursday.

The SEC alleges that the group “perpetrated a scheme to trade ahead of multiple announcements regarding certain crypto assets that would be made available for trading on the Coinbase platform.”

The SEC asserts that Wahi, who worked in the company’s asset listing team, tipped off his brother and friend about new coins that were to be listed on the exchange. By doing so, the group was able to trade on insider information and make more than $1.5 million in profits off of 25 different assets.

US Attorney Damian Williams described this as “the first ever insider trading case involving cryptocurrency markets.”

Ok. Not a great look for Coinbase as they should have caught this before crypto Twitter did.

But, based on the indictment, it looks like Coinbase did have mechanisms in place to try to stop insider trading from happening and as soon as they found out that it occurred, they cooperated with authorities. At the end of the day, it’s worth mentioning that Coinbase wasn’t charged with anything. Instead, only the people directly associated with the insider trades got penalized.

The story doesn’t stop here though. As it turns out, what was buried within the contents of the SEC indictment is whole different beast. This is where things get pretty interesting…

Inside the complaint, the SEC alleges that the defendants ultimately committed securities fraud. But in order to commit securities fraud, the defendants would have needed to trade… well, securities.

Therefore, in what Matt Levine describes as “a weird way for the SEC to say that Coinbase is running an illegal securities exchange,” the SEC is in a round-about way claiming that Coinbase has listed and allowed the trading of securities.

The assets that the SEC classified as securities are: AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, KROM.

Regulation by Enforcement

Since Coinbase’s launch in 2012, we’d be hard pressed to find another crypto company that has so openly and willingly attempted to enter conversations with the SEC.

Remember, this is the company that attempted to productively engage with the SEC around a lending product (that dozens of companies already had on market). In response, the SEC issued a Wells notice (an official way to tell a company that the SEC is going to sue them).

Now, in the middle of an unrelated indictment, the SEC is accusing Coinbase of allowing trading in securities and is accusing nine other tokens of being securities.

This, as Jake Chervinsky puts it is “regulation by enforcement.” (Go read Jake’s thread if you want to learn more about why this situation is so nefarious)

Coinbase’s Chief Legal Officer, Paul Grewal, immediately penned a response stating that:

But, the SEC didn’t stop there.

Yesterday, Bloomberg reported that the SEC is officially investigating the exchange. The company’s shares dropped 21% on the news.

Our Take

It’s not that the SEC doesn’t have the jurisdiction to enforce regulations…

It’s that that jurisdiction doesn’t give the SEC the right to engage in unjust tactics to get their way.

It’d be one thing if the SEC actually cared about protecting retail investors. If they did, one of the clearest ways to protect investors would be putting together a regulatory framework that all companies could follow and adjust to accordingly. Perhaps the SEC would have saved investors from broken, now bankrupt companies like Celsius.

Instead, the SEC has spent the majority of its time enforcing unclear regulations, through a process where exchanges and token projects alike have no way to defend themselves.