Crypto crime chaos as conflicting commission claims cause confusion

Federal law enforcement officials have different opinions about whether insider trading in cryptocurrency assets constitutes a serious crime or if bilking customers is simply business as usual, but Wall Street billionaires are paying off politicians to resolve the matter in a way that pleases those who exploit consumers.

The Securities and Exchange Commission on July 21, 2022, announced insider trading charges against a former product manager at Coinbase Global, Inc. (Coinbase), his brother, and his friend for perpetrating a scheme to trade ahead of multiple announcements regarding certain crypto assets that would be made available for trading on the Coinbase platform.

The SEC’s complaint alleges that, while employed at Coinbase, Ishan Wahi helped to coordinate the platform’s public listing announcements that included what crypto assets or tokens would be made available for trading.

Damian Williams, the United States Attorney for the Southern District of New York, and Michael J. Driscoll, the assistant director-in-charge of the New York Field Office of the Federal Bureau of Investigation (FBI), announced the unsealing of an indictment charging those three men with conspiracy and wire fraud in connection with their scheme to commit insider trading in cryptocurrency assets.

According to the SEC’s complaint, Coinbase treated such information as confidential and warned its employees not to trade on the basis of, or tip others with, that information. However, from at least June 2021 to April 2022, in breach of his duties, Ishan repeatedly tipped the timing and content of upcoming listing announcements to his brother, Nikhil Wahi, and his friend, Sameer Ramani.

The “charges are a further reminder that Web3 is not a law-free zone,” Williams said. “Our message with these charges is clear: fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street.”

Ahead of those announcements, which usually resulted in an increase in the assets’ prices, Nikhil Wahi and Ramani allegedly purchased at least 25 crypto assets, at least nine of which were securities, and then typically sold them shortly after the announcements for a profit.

The long-running insider trading scheme generated illicit profits totaling more than $1.1 million.

“We are not concerned with labels, but rather the economic realities of an offering,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement. “In this case, those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase. Rest assured, we’ll continue to ensure a level playing field for investors, regardless of the label placed on the securities involved.”

Two of the defendants have been arrested—one while he was attempting to leave the country—and are now held in U.S. law enforcement custody but it is a subject of debate whether there was any crime at all.

“The case SEC v. Wahi is a striking example of ‘regulation by enforcement.’ The SEC complaint alleges that dozens of digital assets, including those that could be described as utility tokens and/or certain tokens relating to decentralized autonomous organizations (DAOs), are securities,” said Commissioner Caroline D. Pham, of the Commodity Futures Trading Commission.

Coinbase says the men could not have possibly committed securities fraud, because the crypto exchange doesn’t even offer clients the ability to trade securities and Pham appears to think so as well.

“In nearly a year, the defendants collectively earned over $1.1 million in illegal profits by engaging in an alleged insider trading scheme that repeatedly used material, nonpublic information to trade ahead of Coinbase listing announcements,” said Carolyn M. Welshhans, Acting Chief of the Enforcement Division’s Crypto Assets and Cyber Unit. “As today’s case demonstrates, whether in equities, options, crypto assets, or other securities, we will vindicate our mission by identifying and combatting insider trading in securities wherever we see it.”

The SEC’s complaint, filed in federal district court in Seattle, Washington, charges Ishan Wahi, Nikhil Wahi, and Ramani with violating the antifraud provisions of the securities laws and seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against all three individuals.

If the Commodity Futures Trading Commission and the Securities and Exchange Commission (SEC) cannot agree on what is required by the Dodd-Frank Wall Street Reform or Consumer Protection Act of 2010, then Congress is going to need to clarify those laws.

The industry is also creating concern about political corruption as government officials who must decide how to regulate cryptocurrency are influenced with cash contributed to their campaign funds.

After 30-year-old billionaire Samuel Bankman-Fried donated more than $30,000 to two top lawmakers, they sponsored legislation to give him exactly what he wants, weak regulation of cryptocurrency.

Sens. Debbie Stabenow (D-Mich.) and John Boozman (R-Ark.), the chair and ranking member of the Senate agriculture committee, introduced the Digital Commodities Consumer Protection Act of 2022, which aims to define Bitcoin and other cryptocurrencies as “digital commodities” rather than securities.

The distinction means cryptocurrency would be regulated by the Commodity Futures Trading Commission, which has fewer than 700 employees, rather than the much stronger Securities and Exchange Commission, with its 5,261 investigators and other staff.

Known by his initials SBF, the founder and CEO of the cryptocurrency exchange business FTX, Bankman-Fried said he would spend as much as $1 billion of his estimated $12.8-billion fortune influencing American politics by the 2024 election, joining the ranks of megadonors such as George Soros and the Koch brothers.

Bankman-Fried made the second-largest donation to Joe Biden’s presidential campaign and he has contributed at least $34 million to political candidates and causes since January.

The outsized influence of wealthy political donors is an affront to everyone who believes in democracy, but politicians operating in the world of desperately seeking donations.

In one Florida congressional district, Bankman-Fried elevated the profile a 25-year-old contender in a field of ten candidates with a $1 million campaign expenditure.

In a race with two former US representatives, a state senator, a prominent civil rights lawyer and several other serious contenders, the youngest candidate—a high school graduate who has been a candidate for Congress longer than he has held almost any job—the cryptocurrency billionaire’s money has made all the difference.

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