© Kevin Ditch - Getty ImagesAs the battle between the crypto industry and Gary Gensler's Securities and Exchange Commission escalates, the warring industry is pinning its hopes of winning on an unlikely ally: Ishaan Wahi, a former employee of crypto exchange Coinbase, who announced last month that he had pleaded guilty to prosecutors. as a fee. as the first instance of insider trading in cryptocurrencies.
Wahi admitted that his employer shared sensitive information with his brother and friend in order to get over $1.5 million, and the crypto companies' motivation is not to remove his name from the two fraudulent accounts.
Instead, large companies such as Coinbase and VC Paradigm have attempted to file legal briefs with friends in a separate SEC case against Wahi, in which the agency accuses a former executive of insider trading in various cryptocurrencies. active titles.
While Congress is still debating the future of cryptocurrency legislation, this gap has raised a key question for regulators: which crypto assets are securities subject to SEC jurisdiction, and which products are subject to the Commodity Futures Trading Commission?
Goods Protection
According to Gensler, the SEC is taking an aggressive approach to crypto, filing enforcement actions and Wells notices or formal notices of completion of investigations against companies such as Coinbase and Kraken. These accusations are based on the SEC's belief that almost all cryptocurrencies are securities and that some companies act as unregistered stock exchanges and broker-dealers.
The definition of "security" introduced in a 1946 Supreme Court case determines whether a transaction is considered an "investment contract", the investment of money in a joint venture in the hope of benefiting from the efforts of others. Many in the crypto industry are adamant that most cryptocurrencies do not fall into this category, and Coinbase claims that over 200 cryptocurrencies available on its platform are not securities.
As a director of Coinbase, Wahi knew firsthand which tokens Coinbase wanted to list and shared the information with his brother and friend to make trades before they came up and profit from the resulting shock. In the case against Wahi, the SEC says it has jurisdiction because all cryptocurrencies of Wahi and its subsidiaries were securities, including AMP, DDX, XYO and RGT.
Wahi, represented by the law firm Jones Day, tried to dismiss the case by arguing that all cryptocurrencies fail the Howey test and therefore are not subject to SEC jurisdiction. To this end, Wahi's attorneys rely on the Fundamental Issues Doctrine, a legal principle that states that agencies like the SEC cannot broadly interpret laws on important economic or political issues. Since Congress has yet to pass laws on cryptocurrencies, the SEC should not be allowed to comment on the new question of how a crypto asset is defined.
"The SEC cannot use the term 'investment contract' to cash a check in an attempt to expand the scope of its regulation," Wahi's attorneys wrote in a motion to dismiss. "And he can't lay claim to the huge new digital asset industry without clear congressional permission."
Powerful Allies
While Gensler has repeatedly stated that almost all cryptocurrencies other than bitcoin fall under the definition of a security, the SEC has yet to challenge the issue in court. Many in the crypto industry see Wahi's civil lawsuit against the SEC separate from his criminal lawsuit against the DOJ as a tool to challenge the agency's interpretation.
Several groups have filed Friend of the Court briefs against the Wahi-backing SEC, including two cryptocurrency trading groups, the Chamber of Digital Commerce and the Blockchain Association. On March 22, Wahi's former employer, Coinbase, also applied for the amicus briefing, and on Monday, a judge also allowed Paradigm to hold the briefing.
“Because the SEC's allegations in this case are based on the agency's misconception that Coinbase lists digital assets as digital securities, Coinbase has a special and compelling interest in explaining the SEC's misinterpretation. SEC securities laws,” lawyers wrote about the company in their letter. . . Notification. to court
Wahi is awaiting a verdict in his criminal case and the outcome of the SEC case will not affect the outcome of the case. The Wall Street Journal reported on Sunday that Coinbase is not funding its SEC defense, but its law firm did not disclose where the funding came from.
This story originally appeared on Fortune.com
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