Why the Coinbase Insider Trading Charges are a Big Deal
The SEC and DOJ have brought charges on individuals who have allegedly engaged in insider trading from within Coinbase.
This week charges were brought against a Coinbase Product Manager, as well as his brother and a friend. For a long time, prices of assets consistently rose before being listed on Coinbase even though there was no clear public guidance that the asset was going to be listed. We all knew that this meant there was insider trading happening, but crypto has been the wild west. The SEC is bad at caring about insider trading in real stocks as is, and in crypto they were entirely absent.
Now it looks like both the DOJ and SEC have decided it’s time to act. The DOJ brought forward charges of wire fraud conspiracy and wire fraud–notably, securities fraud is missing from that list. On the other hand, the SEC has explicitly named tokens as securities: Power Ledger’s POWR token, Flexa’s AMP token, Rally’s RLY token, DerivaDEX’s DDX token, XY Labs’ XYO token, Rari Capital’s RGT token, Liechtenstein Cryptoassets Exchange’s LCX token, DFX Finance’s DFX token, and Kromatika Finance’s KROM token.
From the SEC filing:
Nikhil and Ramani traded in securities subject to the federal securities laws because these crypto assets were investment contracts; they were offered and sold to investors who made an investment of money in a common enterprise, with a reasonable expectation of profits to be derived from the efforts of others.
The SEC is signaling that they’re ready to start the prolonged battle of pulling tokens under the umbrella of securities regulation. I see some big pros and cons here: on the con side, this industry has largely strived due to a lack of regulation, and it’s not a stretch to say that regulation from heavy handed federal agencies like the SEC has been responsible for limiting growth and cutting off opportunity in other industries.
On the pro side, many of these tokens are clearly some form of equities, or they are predatory to investors. Many companies create a token with an aggressive issuance schedule, and in order to avoid being considered an equity, they make the token tied to some promise of governance instead of ownership in a company. This governance is often meaningless, and investors frequently have no say in what the company does. Tokens like this need to be reigned in, as the only people hurt in the current system are investors who are funding these companies with no clear path to profiting.
A lot of the average person’s concerns with cryptocurrency has been a lack of security. Love it or hate it, regulation will bring more trust and security to the cryptocurrency space.
This is not the first time that crypto insiders have had consequences, though it is an early one. OpenSea’s Head of Product was caught trading on knowledge of what NFTs would be promoted on the site’s homepage.