US Securities and Exchange Commission (SEC) charged a former Coinbase manager and two others with insider trading for purchasing 25 tokens before Coinbase announced the tokens would be listed.
It is the first time that the SEC has taken action against the affiliates of a major digital asset intermediary in the United States, which suggests the SEC will intensify regulatory and enforcement efforts against digital asset exchanges, in line with Gary Gensler’s public pronouncements regarding digital asset exchange regulation.
According to the Complaint, filed in a federal district court in Seattle, many publicly traded digital assets are securities, and intermediaries should be subject to securities regulation, regardless of whether they claim to do so.
In this case, they affirm that a number of the crypto assets at issue, as well as the defendants’ alleged insider trading ahead of their Coinbase listing, were securities. Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said, “We are not concerned with labels, but rather with economic realities of an offering. 1
Criminal charges for insider trading
The Complaint alleges that the three violated securities law antifraud provisions and seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties. Criminal charges have also been filed against the three by the U.S. Attorney’s Office for the Southern District of New York.
As the result of an investigation the SEC is conducting into insider trading at digital asset exchanges, the SEC’s action may be the result of a recent Department of Justice insider trading case against an employee of a platform for non-fungible tokens, or NFTs. The enforcement and efforts against intermediaries in the digital asset market have dramatically increased in recent months, as indicated by these recent actions.
There are “at least nine” tokens that the SEC specifically identifies as securities in its Complaint, including AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, and KROM. Despite not identifying them, the Complaint leaves open the possibility that the other 16 tokens are not securities.
Security status of these nine assets (AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, and KROM)
Until the enforcement action is resolved, the Complaint will likely create significant uncertainty regarding the security status of these nine assets and may cause some U.S. crypto market participants to restrict their trading.
SEC’s action foreshadows a significant new trend-increasingly greater regulatory scrutiny of digital asset exchanges, even those that claim not to transact in securities, regardless of regulatory status.
Wilson Sonsini attorneys Rob Rosenblum, Amy Caiazza, Neel Maitra, or another member of Wilson Sonsini’s Securities Regulatory and Complex Transactions practice group can provide more information about this SEC enforcement action.
Contact any member of Wilson Sonsini’s securities litigation group, or Beth George, for more information about Wilson Sonsini’s Strategic Risk and Crisis Management teams and how they can assist companies in the digital asset space.
[1] See U.S. Securities and Exchange Commission Press Release (July 21, 2022), available at https://www.sec.gov/news/press-release/2022-127.
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