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SEC Will Need to Prove Tokens Are Securities in Coinbase Insider-Trading Case, Legal Expert Says

Chip Somodevilla/Getty Images

The U.S. Securities and Exchange Commission will need to prove the tokens listed on the Coinbase crypto exchange are securities for it to pursue its current insider-trading case against a former Coinbase product manager and his associates, according to a former persecutor.

Ian McGinley, now a partner at the law firm of Akin Gump Strauss Hauer & Feld, told CoinDesk TV’s “First Mover” Friday that the SEC couldn't have filed the case unless the tokens in question are securities.

“They don’t have a wire fraud statute like the DOJ does,” McGinley said, referring to wire fraud charges issued by the U.S. Department of Justice on Thursday.

McGinley, who served more for more than a decade as an assistant U.S. attorney in the Southern District of New York, noted the Justice Department can sidestep the debate of whether the tokens are securities.

“The SEC doesn’t have that option,” McGinley said. “They will have to prove that it's a security.”

The SEC’s charges followed a complaint issued by the DOJ, alleging that Ishan Wahi, a former product manager at Coinbase, engaged in wire fraud and conspiracy to commit wire fraud. The charges allege that Wahi shared confidential Coinbase information to tip off his brother Nikil Wahi and associate Sameer Ramani about which digital tokens were scheduled to be listed on the cryptocurrency trading platform. The two brothers and Ramani allegedly netted $1.5 million in profits from trading the tokens.

The SEC brought forth charges against the trio based on the same allegations. For the first time, however, the SEC used the complaint to identify the nine tokens the three allegedly traded as securities, without charging the issuers or exchanges issuing the digital assets.

McGinley notes that in this case, Coinbase is the victim “because it was their confidential information that was allegedly stolen.” Whether the crypto exchange will file to intervene as a witness remains to be seen. “They’re not a party to this action. They haven’t been charged in either case,” McGinley said.

Coinbase could be walking a fine line, McGinley said. On one hand, the defendant violated the exchange’s confidentiality policy and Coinbase doesn't “want employees [to be] able to do this.” On the other, the platform has responded to the case by saying that the tokens in question are not securities.

Generally, the SEC has brought enforcement actions against token issuers. In this case, the question of whether the issuers will have the opportunity to defend themselves remains unclear.

Earlier this week, Coinbase filed a petition to the SEC criticizing the current state of crypto regulation in the U.S., noting the “existing rules for securities just do not work for digital assets,” underscoring that without effective regulation, the U.S. would fall behind in digital asset innovation.

Whether Coinbase can be used as an example is still a gray area when it comes to regulation. “It really depends on the regulator,” McGinley said.

“This is the SEC saying, ‘We don’t need any new regulation here. A security token acts like a security, it walks like one, [and] we’re going to treat it like one for this insider-trading case,’” McGinley said.

Read more: Ex-Coinbase Manager Among 3 Arrested on Crypto Insider Trading Charges