SEC Wins Crypto Court Case — Will it Shake Up Whole Cryptoverse?

Key Takeaways

• A judge ruled cryptos can be securities.
• John Reed Stark says court’s decision was a mammoth loss not only for Coinbase but for the whole cryptoverse
• Coinbase disputes the ruling’s validity.

An American judge recently ruled in favor of the Securities and Exchange Commission (SEC), determining that the trading of specific crypto assets on secondary markets constitutes securities transactions.

This ruling came in an insider trading case involving Ishan Wahi, a former product manager at the Coinbase cryptocurrency exchange, his brother Nikhil Wahi, and their friend Sameer Ramani.

Ruling Deems Certain Crypto Trades as Securities Transactions

US District Court Judge Tana Lin for the Western District of Washington ruled that trading specific cryptocurrencies on secondary markets are securities transactions. This precedent emerged from what the US Department of Justice (DOJ) called the “first-ever cryptocurrency insider trading case“.

John Reed Stark, the former Chief of the SEC’s Office of Internet Enforcement, said Judge Lin’s decision specifically identifies trading activities on the Coinbase exchange as securities transactions.

He stated :

“According to the SEC’s original July 2022 complaint, the tokens traded on Coinbase and alleged to be securities by the SEC included: Amp, RLY, DDX, XYO, RGT, LCX, POWR, DFX and KROM.”

Coinbase Faces SEC Charges

Coinbase itself wasn’t directly implicated in the Wahi insider trading case. However, the SEC filed charges against the cryptocurrency exchange in June last year. It took action because, it said, Coinbase did not register as an exchange, broker-dealer, or clearing agency.

Reed Stark, also drew attention to contrasting decisions in high-profile crypto cases by Judges Jed Rakoff and Analisa Torres. In July, Judge Torres determined that the direct sales of XRP tokens to institutional investors, like hedge funds, were unregistered securities. On the other hand, she found that secondary market sales on exchanges were not.

In stark contrast, a few weeks later, Judge Rakoff explicitly rejected Judge Torres decision, Stark claimed.

Stark added :

“IMHO, Judge Lin’s decision was a mammoth loss not only for Coinbase because of its obvious ramifications but also for the cryptoverse because Judge Lin’s decision was a harbinger of the kind of future rulings that lie ahead.”

Coinbase’s Legal Head Blasts SEC’s Uncontested Victory in Wahi Case

Coinbase’s Chief Legal Officer, Paul Grewal, expressed skepticism regarding Judge Lin’s recent ruling. Indeed, he responded to an inquiry about the case with minimal concern. Grewal emphasized the ruling was the result of a default judgment. He highlighted that such judgments were not contested because the defendant did not appear in court to challenge the SEC’s allegations. As a result, this leaves the court no option but to only consider the plaintiff’s side of the argument.

Grewal pointed out that in default judgment scenarios, the judge is compelled to accept the plaintiff’s claims as truth. This, according to Grewal, raises questions about the judgment’s fairness and validity.

In the aftermath of this ruling, the SEC used the decision, which identified certain tokens offered on Coinbase as securities, to bolster its case against Binance.