Coinbase Insider Trading
Former Coinbase Employee Ishan Wahi was arrested on the morning of 7/21 for leaking upcoming cryptocurrency information to two of his accomplices, representing the first legal case of cryptocurrency insider trading and highlighting the debate over what type of asset cryptocurrencies really are.
Coinbase is a popular cryptocurrency platform currently supporting over 200 cryptocurrencies or “coins.” These coins can be easily bought and sold on the platform. As time goes on, more and more coins get added onto the platform. Each coin added temporarily increases the value of the coin, mostly due the listing. This allows early investors of the coin to make a quick profit from selling the coin during this rush.
What is Insider Trading/Crypto Insider Trading?
When you or I go and buy an asset like a stock in a company, we can only make educated guesses on how the stock performs based on publicly available data like earning reports and the general trend of the stock market.
Now, imagine if you somehow found out from your friend who works at the company and he informs you of a revolutionary new technology nobody else outside the company knows about.
Based on this information, you decide to buy more of their shares and then sell them after the company publicly announces its project once the stock skyrockets. This is an example of insider trading and is illegal because you have unfair access to information about the asset that will impact the price.
How did Ishan do it?
Similar to getting information about a top-secret project from a company employee, Ishan used his access to the confidential list of cryptocurrencies Coinbase planned to list and informed his brother Nikhil Wahi and his associate Sameer Ramani about upcoming coins on the platform.
This inside information allowed Nikhil and Ramani to buy the upcoming cryptocurrency before Coinbase officially announced its listing for the coin. Thus, they started purchasing coins and then selling the coins when demand increased after the announcements.
Authorities believe the insider trading occurred between June 2021 and April of 2022, with the trio netting approximately $1.5 million in profits.
The Arrest and Charges
Law enforcement apprehended Ishan at the Seattle airport, possibly attempting to flee the country with a one-way ticket to New Delhi, India
In addition to Ishan, his brother Nikhil was also arrested for partaking in the scheme, while Ramani remains at large.
After the arrests, the men were all charged with wire fraud conspiracy, any type of fraud/scam done electronically, while the Security and Exchanges Commission (SEC) accused the group of insider trading and securities fraud.
The Debate
While there was very little controversy regarding the wire fraud conspiracy charge, there has been a debate over whether the coins should be considered securities.
In the official SEC complaint filed on this incident, the SEC considered nine of the 25 total tokens involved as securities, which would mean the tokens would be regulated as regular old-fashioned securities like stocks.
However, Coinbase Chief Legal Officer Paul Grewal disagrees with the SEC’s classification of the coins as securities. “[We] 100% disagree with the SEC’s decision to file these securities fraud charges and the substance of the charges themselves,” Grewal wrote, arguing that each Coinbase listing goes through an SEC-approved approval process to ensure that the listed coins are not considered assets.
Coinbase has officially filed a request to the SEC to begin creating rules to support this new class of assets dubbed “digital asset securities” and allow the crypto market a fair chance at growth.