What's next for the SEC's case against a former Coinbase manager, and what it means for crypto

An ongoing legal battle between the Securities and Exchange Commission and a former Coinbase product manager for alleged insider trading could put the industry in a lurch as to what other cryptocurrencies could be under the agency’s realm, experts say. 

The SEC charged Ishan Wahi, a former Coinbase product manager in July, as well as his friend and brother for insider trading, claiming that Wahi tipped off the other two about which tokens were going to be listed for trading on Coinbase — and in the process made over $1 million. 

But what especially grabbed industry and market attention was that the agency said nine of the listed cryptocurrencies involved were securities.

The declaration represented another concrete step in the SEC's establishment of most tokens as securities, one that observers expect to create additional legal precedent: if the case goes to trial and a judge agrees with the SEC, it could lead to actions against Coinbase and other exchanges for listing those same tokens. 

“If your view is that these assets are substantively similar to other digital assets, then what you’re showing is that the SEC could easily pick other digital assets and do the same thing to another trading center,” said Ty Gellasch,  president and CEO of the Healthy Markets Association, a financial regulatory policy nonprofit. “The SEC could do this quite a bit.”  

'Opening salvo'

The case against Wahi is an “opening salvo by the Securities and Exchange Commission that the darkness that used to surround the crypto markets no longer surrounds it,” said Andrew Stoltmann, a Chicago-based securities lawyer and adjunct law professor at Northwestern University.

“I think the crypto industry has a large kick me sign on the back of them right now because the SEC had been hands-off, but I think that era is now over,” Stoltmann said.  

Even if a judge were to disagree with the agency on whether all of those tokens are securities, the SEC only needs a judge to agree that one is a security, said Gellasch, a former Democratic SEC staffer.  

“We don’t know how many other digital assets the SEC decided to analyze before they determined that these nine were,” Gellasch said. “They might have looked at 10, they might have looked at 50, at a hundred.”    

If the case continues and a judge determines that one or more of the tokens involved are securities, then you would expect the SEC to apply that to other market participants who might be trading them, Gellasch said. The decision would be limited to the tokens the judge decides to rule on. 

Once it is determined that an exchange is trading securities, it is then required by law to register with the agency and comply with rules regarding operations, risk controls and more, Gellasch said.  

"Oddly, Coinbase hasn't done that, and the SEC hasn't sued the company for violating the law, either,” Gellasch said. 

A Coinbase spokesperson said the exchange has a rigorous process to analyze and review each digital asset before making it available on the exchange.

"These assets have never been found to be a security by any court and we remain confident that Coinbase’s rigorous review process keeps securities off Coinbase’s platform," a Coinbase spokesperson said.

Settle down 

If there is a pre-trial settlement, there is “almost no direct precedential value, other than a sort of indirect warning,” Gellasch said.   

SEC settlements are generally on a no admit, no deny basis, meaning that the subject of the action doesn't admit or deny the underlying charge. With settlements, the judge is not making a decision and a court could disregard a settlement in future actions. 

“If there is a settlement, it doesn’t prove that those things are securities for the next guy,” Gellasch said.  

If Wahi settles, then the SEC’s assertions that the tokens are securities will never be tested, said Ashley Ebersole, general counsel at 0x Labs and a former SEC attorney.  

“With a resulting settled order, crypto industry market participants may be left with the consequences of an outcome that implicitly ratifies the SEC’s assertion that various tokens are securities, leaving them to adjust their own practices accordingly but giving them no analysis to inform their token assessments,” Ebersole said.  

A broader question  

Trading venues and DeFi protocols should ask themselves how the nine tokens are different from what they are trading now, Gellasch said.  

"The SEC laid out a framework for how market intermediaries should evaluate what digital assets are likely to be securities, and we should expect the agency to apply that now.” Gellasch said. "Many market intermediaries seem to be ignoring the SEC's suggestions, or if they are doing any analysis, they are either doing shoddy analysis are ignoring the results."  

The motion to dismiss the SEC’s case is due in February. If the judge denies that then the case would proceed unless Wahi decides to settle.  

David Miller, a shareholder at the law firm Greenberg Traurig, LLP, representing Ishan Wahi in the case against the SEC, declined to comment.