As the use of cryptocurrency investments increases around the world, regulators face a series of new challenges, especially related to applying various laws to regulate new digital assets. To date, courts have not reached a definitive conclusion as to whether cryptocurrencies, in any of their myriad forms, are “investment contracts” (and therefore securities) within the meaning of the Howey test., or under the jurisdiction of another regulatory authority, such as the Commodity Futures Trading Commission. Investors do not have a clear understanding of the law enforcement and regulatory risk landscape, but the rapidly evolving legal landscape has provided no easy answers.
This lack of clarity hasn’t stopped the Securities and Exchange Commission (SEC) from filing lawsuits against issuers, backers, and now individuals denouncing insider trading. Filed in the SEC, United States District Court for the Western District of Washington. first actionaccused three men: Ishan Wahi (former manager of Coinbase Global, Inc.), Nikhil Wahi (Ishan Wahi’s brother), and Sameer Ramani (Wahis’ friend). Violation of Section 10(b) of the Securities Exchange Act (15 US.C § 78j(b)) and Rule 10b-5 (17 CFR § 240.10b-5) A scheme in which Ishan Wahi allegedly traded on non-public information known to him through his employment at Coinbase. At about the same time, the US Attorney’s Office for the Southern District of New York (SDNY) Ishan Wahi, Nikhil Wahi, Sameer Ramani charged with wire fraud However, there was no securities fraud or the SEC’s underlying determination that the crypto assets traded by the Wahi brothers and Ramani were “securities” under the Securities Act.
These cases highlight the current lack of regulatory certainty and lack of a clear framework for digital assets. Moreover, this action could have significant repercussions for regulated entities and even other operators in the crypto space. Ultimately, the lawsuit could provoke further legislative and/or regulatory action and ultimately provide much-needed clearer information regarding regulatory scrutiny of digital assets. I have.
In its complaint, the SEC alleges that Wahi repeatedly passed on to his brother and friends insider information about Coinbase’s “listing announcement” obtained through his employment as Coinbase’s Assets and Investing Products Group Manager. Coinbase announced certain new crypto assets listed for trading, sometimes minutes before the crypto assets were pushed to Coinbase’s platform. This insider information was used in at least 25 pre-announcement deals, allegedly resulting in profits of at least $1.1 million.
Notably, at least nine of the crypto assets traded were claimed to be “crypto securities,” but these specific crypto assets were undoubtedly related to utility tokens and/or decentralized autonomous organizations (DAOs). can be described as a token that The “crypto-asset securities” expressly identified in the complaint were AMP, RLY, DDX, XYO, TRGT, LCX, POWR, DFX, and KROM.
After receiving information from Ishan Wahi, his brother and his friends immediately purchased the newly launched asset, according to the SEC complaint, and either sold or bought it once the Coinbase public started buying tokens. exchanged tokens for more stable ones. Lock your ill-gotten gains using cryptocurrencies (such as Ether and Bitcoin).
As seen in the SEC Complaint, for each of the nine named “cryptographic securities assets” allegedly purchased by defendants based on nonpublic information, the SEC: Howie It conducted tests and claimed that the nine named crypto-assets were “investment contracts.”
For example, for joint ventures, components of Howie In our testing, examples of common corroborating fact patterns that the SEC relies on include the use of funds raised by the purchase of crypto assets to launch, develop, and/or develop platforms, protocols, or other projects. It is included that it is for improvement. In addition, crypto assets are supported by extensive marketing, Among other things, The total amount of crypto assets was finite (for example, Due to supply and demand, crypto buyers may benefit from increased demand for crypto as users/services grow, despite the limited supply of tokens.) and/or staking (in short, “Locking up” crypto assets for a period of time as a way of contributing to the blockchain network in exchange for rewards. usually in the form of additional crypto assets).
However, the determination of whether a crypto-asset is a security is fact-based and currently does not have a clear U.S. regulatory framework. The SEC’s underlying analysis is not well-established jurisprudence, and we see similar fact patterns with respect to other crypto assets that the SEC does not claim to be securities. for example, Ethereum.
Another question that has been raised is whether the SEC will by default attempt to apply this rubric to all kinds of digital assets. (NFTs) or other crypto assets, like stablecoins. As such, these issues may provide some guidance for specific assets, but that guidance may not map to different fact patterns.
More notably, Coinbase (which acted as an exchange platform on which so-called “crypto asset securities” were offered) was also the issuer (in short, The creators of the alleged “crypto-asset securities”) were named as defendants in the lawsuit, but would implicitly bear liability if the identified “crypto-asset securities” were in fact found to be securities. There is a possibility (for example, Liability arising from the offering/sale of unregistered securities in the absence of an exemption (where applicable).
Finally, the fact that the two regulators are taking separate steps suggests that there may not be consensus on who should be the lead regulator and who should take the lead. doing.Further confusing the issue is the Commodity Futures Trading Commission’s make a statementThis calls into question whether the SEC and SDNY law firms are regulating crypto assets through enforcement action rather than a formal regulatory process that generally allows comment. Clearly, the agreement may require more formal guidance from state and federal legislative branches, and less of the various judicial and executive branches needed to challenge it in court.
In the short term, the resolution of this case is likely to take considerable time, creating further uncertainty for funds and investors active in the cryptocurrency space. For example, the SEC’s action may be pending disposition of SDNY’s parallel action or another separate proceeding, or may be delayed due to the intervention of a third party such as Coinbase, another cryptocurrency exchange, or a cryptocurrency issuer. may occur. Assets that the SEC asserts are securities in which the SEC has an interest in avoiding classifying such assets as securities.
Longer term, the final ruling could provide some resolution as to whether digital asset issuances and investments are subject to federal securities law.However, the ruling on that topic Wahi It likely pertains only to the nine covered digital assets, may not apply to others, and may continue to push for classification as a security by the SEC.Under Chairman Gary Gensler, The SEC has generally increased its focus on cryptocurrencies and warned investors of the risks. Gensler states that the SEC, under existing authority, regulates crypto-assets, which can be defined as securities, and that platforms dealing with regulated digital assets are subject to the SEC, unless they are subject to exemptions under applicable securities laws. I made it clear that I need to register. If certain digital assets are determined to be securities, issuers, investment funds, or fund managers dealing in such assets will be subject to registration requirements under the Investment Company Act and/or the Investment Advisers Act. There are cases.
Given the current regulatory environment, potential investors, issuers of cryptocurrencies, or parties trading in cryptocurrencies are obliged to be aware of the risks of coercion from various government agencies. Additionally, as there is no definitive ruling yet on the regulatory regime governing cryptocurrencies in the United States, and future state and federal laws regarding mining and use may be enacted, businesses and individuals may A high degree of care should be taken when evaluating Take risks and listen to the pavement as more rulings, decrees and legislation are announced from courts and governments. Such risks should be disclosed in marketing materials and investment prospectuses so that the uncertainty to which crypto assets are subjected is rigorously described.
This one-of-a-kind case is expected to shed light on a major regulatory compliance issue surrounding cryptocurrencies and potentially cryptoassets, including NFTs. As the first major law firm to purchase land in the Metaverse, ArentFox Schiff is closely monitoring developments in these cases and related developments with the SEC, CFTC, or other important considerations in the crypto-asset space. increase.
 SEC v. WJ Howey Co.328 US 293 (1946).
 SEC vs WahiNo. 2:22-cv-01009 (WDWash, 21 July 2022), https://www.sec.gov/licigation/complaints/2022/comp-pr2022-127.pdf.
 USA vs WahiNo. 22-cr-392 (SDNY 21 July 2022) https://www.justice.gov/usao-sdny/press-release/file/1521186/download.