Three individuals are facing criminal and civil charges in the first-ever cryptocurrency insider trading scheme. In its July 21, 2022 announcement, the U.S. Attorney for the Southern District of New York (“SDNY”) alleges that Ishan Wahi, through his managerial position at the U.S. publicly traded corporation, Coinbase Global, Inc. (“Coinbase”), engaged in insider trading. Specifically, they allege that he shared confidential (insider) Coinbase information about which crypto assets were scheduled to be listed on Coinbase's exchanges with his brother, Mikhil Wahi, and friend, Sameer Ramani.
The trio have been indicted on charges of wire fraud conspiracy and wire fraud, each of which carry a maximum sentence of 20 years. On the same day, the Securities and Exchange Commission (“SEC”) also announced insider trading charges against the trio on the same facts.
Coinbase is one the largest cryptocurrency exchanges in the world and the only crypto exchange publicly traded in U.S. markets. Generally, Coinbase is a platform where users can acquire, hold, exchange and sell various crypto assets through their online user accounts. Notably, New York City Mayor Eric Adams made headlines earlier this year when he used Coinbase’s direct deposit feature to convert his first few paychecks into Bitcoin. As a trading platform, Coinbase periodically adds new crypto assets to its exchange, which causes a significant increase in crypto market activity and most often increases the market value of the crypto asset being announced at the time. Coinbase considers this information strictly confidential and prohibits all its employees from disclosure.
In a nutshell, insider trading occurs when individuals with exclusive access to confidential or non-public material information relating to a company, its business operations, future plans/intentions or plans that would otherwise affect the company’s market value, use/disclose such information in order to gain a profit from the probable increase (or decrease) in the company’s (or, as in this case, crypto asset) market value, once the same information is released to the public (or non-insiders). Courts determine liability for insider trading using Rule 10b-5 under Section 10(b) of the Exchange Act.
According to the U.S. Attorney for the Southern District, through his position, Wahi had access to highly confidential, non-public material information relating to certain crypto assets that were scheduled to be added to Coinbase’s exchange. From June 2021 through April 2022, the trio used anonymous Ethereum blockchain wallets to disguise the purchasing of hundreds of thousands of crypto assets in soon-to-be-announced additions.
The indictment further alleges that the scheme generated realized and unrealized gains totaling approximately $1.5 million before being exposed on Twitter. A Twitter user with the handle “Cobie” led the Federal Bureau of Investigation (“FBI”) to commence its initial investigation into the scheme. On April 12, 2022 Cobie posted on Twitter: “Found an ETH address that bought hundreds of thousands of dollars of tokens exclusively featured in the Coinbase Asset Listing post about 24 hours before it was published...” On April 13, Coinbase’s chief security officer replied to the tweet and advised that the company was investigating the matter. According to the indictment, Cobie was tweeting about the Ethereum blockchain wallet owned by Wahi’s friend.
In response to the controversy, Coinbase recently filed a petition with the SEC, requesting that the regulator propose rules or clear guidance as to which digital assets or identifiable characteristics of digital assets are likely to be subject to the prohibition on insider trading.
In whole, this is a positive step for the industry as a clear indication that at least some federal agencies are following through with President Biden’s whole-of-government call to action via Executive Order dated March 9, 2022. While mainstream media and public discourse continue to depict the cryptocurrency and blockchain industry as the “Wild West,” legal disputes and enforcement actions such as this show that existing laws, regulations and enforcement mechanisms can and will be used to induce stability and protect consumers from fraud.
Although additional guidance and clarity is needed, those interested in expanding their business operations or personal investments into blockchain and digital assets may find comfort in knowing that government officials are increasingly drawing regulatory boundaries that attorneys can use as guideposts to anticipate, plan and avoid potential criminal and/or civil liability when providing legal advice.
