Cryptocurrency Faces Heightened Scrutiny from Government Agencies

On Behalf of | Apr 17, 2023 | Firm News |

Crypto Firm Executive Fights SEC Over Definition of Cryptocurrency Tokens

A former manager, Ishan Wahi, at Coinbase which according to its website is a “secure online platform for buying, selling, transferring, and storing cryptocurrency,” pled guilty to wire fraud for giving financial tips on trading cryptocurrency tokens in Coinbase listings to a friend and family member that generated illicit profits for those parties. In a move typical of insider trading, the Securities and Exchange Commission (“SEC”) has sued Mr. Wahi in civil court over his conduct, but Mr. Wahi has sought an early dismissal of the case on the basis that the SEC has no case or jurisdiction against him because he contends that Coinbase’s digital assets aren’t considered securities. Such a contention has long been the subject of debate and consternation between the industry and regulators as the fight over digital assets and cryptocurrencies heats up.

What is a Token?

A crypto token is a digital asset and is created and managed on a specific blockchain platform. Tokens often have a specific purpose, are purported to represent a particular asset, or allow a holder access to products/services. Tokens are typically created and sold through an Initial Coin Offering or Initial Token Offering, where tokens are purchased with other digital assets/cryptocurrencies like Bitcoin or Ethereum but can also be purchased in exchange for government or Fiat currency. The exact value or price of the token are determined by supply and demand, although there have been concerns over the volatility of tokens and whether or not there have been “pump and dump” schemes by certain entities or celebrities, which has invited government scrutiny into how they are operated. A well-known example of a celebrity supported token would include “Dogecoin” which gained popularity overnight due to the public support of high-profile figures like Elon Musk.

The SEC Wants to Extend Their Authority to Regulate Cryptocurrency

How the government ultimately defines cryptocurrency assets and offerings have far reaching consequences into how the industry is regulated, even what services firms can ultimately offer. The SEC and proponents for tighter regulation argue that many industry offerings are similar to traditional stocks and bonds, and thus should be regulated in similar fashion to those that oversee traditional investment firms. However, industry groups argue that the SEC cannot rely on outdated definitions/precedent as it relates to cryptocurrency and other digital assets which are fundamentally different than traditional securities. If the courts were to follow the definition and regulation proposed by the SEC, they could sue firms like Coinbase which could ultimately lead to a halt in trading some digital assets and drastically stifle the growth of the emerging industry. In fact, SEC regulation and their investigations of cryptocurrency exchanges has already led to several companies shutting down certain services and causing others to rethink their offering in the United States.

CFTC Sues Binance Seeking Regulatory Authority Over the Industry

As the case unfolds against Mr. Wahi and the SEC, the U.S. Commodity Futures Trading Commission (CFTC) sued Binance and their founder Changpeng Zhao alleging the company knowingly violated U.S. law by offering unregistered cryptocurrency derivatives. The agency, which Sam Bankman-Fried (the indicted former CEO of FTX), had lobbied to have authority over cryptocurrency rather than the SEC prior to his arrest, cannot bring criminal charges but can levy heavy fines against companies and could lead to Binance being banned in the U.S. in the future. The suit alleges that the company knowingly evaded U.S. regulations by teaching U.S. customers how to use a VPN, which can disguise an IP address location to other regions/countries, in order to trade derivatives on the platform, amongst other violations such as knowing trades were coming from sanctioned people/entities like terrorist groups, going as far as to say in an internal dialogue that customers “were here for crime.” Such explosive allegations will likely further push regulatory action and standards as the industry grows.

With cases such as these emerging, coupled with increased SEC/CFTC investigations into crypto companies and regular enforcement actions, expect to see further cases challenging cryptocurrency regulation in the coming months and years.


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