Crypto Industry Hopes Coinbase Lawsuit Can Ease SEC Oversight

Can a lawsuit against a former Coinbase employee and insider trader help the cryptocurrency sector?

Some in the digital asset world seem to think so, according to a Sunday (March 26) Wall Street Journal report that details the case of Ishan Wahi, whose fate could help determine the future of an industry in crisis.

Wahi, a former Coinbase manager, pleaded guilty earlier this year to providing his brother and a friend with tips that netted them nearly $1.5 million. He’s also facing a civil suit by the Securities and Exchange Commission (SEC), which says some of the assets in the case were securities.

The WSJ notes that while the outcome of that case probably won’t change Wahi’s future — he’s facing jail time — it could change digital asset regulations.

That’s because a motion seeking to dismiss the lawsuit argues the SEC doesn’t have standing because Coinbase’s assets aren’t securities. After all, Wahi’s lawyers contend, their client was charged with conspiracy to commit wire fraud, not securities fraud.

The hope among the industry is that federal judges in suits like these will rule that crypto is different from the stocks and bonds that are governed by Wall Street regulations, the WSJ said.

“This goes beyond the impact of the prior enforcement cases where the entire case came down to that early point in the life of a token, when the company exchanges it for money,” said Nick Morgan, a Los Angeles attorney whose nonprofit organization, Investor Choice Advocates Network, represents people fighting what it says is overreach by the SEC.

“The Wahi case has a much larger impact because this by definition involves secondary and not initial transactions.”

As PYMNTS wrote recently, crypto’s road to regulatory acceptance seems to grow longer each day, and may not even happen in the U.S., if more alarmist observers are to be believed.

Last week saw the SEC issue an alert to investors that cryptocurrency offerings across the U.S. market could be illegal because they are not registered with the regulator.

Tension between crypto businesses and U.S. regulators have peaked recently, with criticism growing louder and louder on both sides.

“The only money you should put at risk with any speculative investment is money you can afford to lose entirely,” the SEC said.

“No crypto asset entity is registered with the SEC as a national securities exchange. … And no existing national securities exchange currently trades crypto asset securities.”

Coinbase responded with a blog entry entitled, “We asked the SEC for reasonable crypto rules for Americans. We got legal threats instead.”

The company said it had been prepared for the action and was confident in its business, “the same business we presented to the SEC in order for us to become a public company in 2021.”