For those with one eye on the ongoing case of Ishan Wahi, an ex-Coinbase manager, the allegations of insider trading go beyond the scandalous details. With both the US Department of Justice (DoJ) and the Securities and Exchange Commission (SEC) pushing ahead with independent charges, the allegations do not affect just those involved. The reverberations from the first federal case on cryptocurrency insider trading will be felt across the entire DeFi industry.
In our latest DeFi 101 addition, we explore the persistent presence of highly unethical trading practices in crypto that rely on insider information. Although the case clearly highlights how this sort of behavior continues to stifle mass adoption efforts, digital asset regulation experts are voicing more substantial worries. The SEC pushing forward independently of the Justice Department may be remembered as the “first shot” of the long-awaited crypto regulatory war.
Jack of insider trades
After Ishan Wahi, a former product manager at Coinbase, pleaded not guilty to federal insider trading charges, it was not the breach of duties or the sums involved that caught the eye of legal experts in crypto. Although the scheme is alleged to have netted those involved up to $1.5m, according to estimates by the Justice Department, it was the fact that the SEC brought independent charges of its own that startled many.
After the Justice Department charged Ishan Wahi, his brother Nikhil Wahi, and an associate Sameer Ramani with wire fraud and insider trading, the SEC brought its own charges of insider trading and formally declared nine of the involved cryptocurrencies as “securities” in the process. Where some saw a small disagreement over the semantics, others have identified a dangerous instance of “regulation by enforcement” that could later be used to expand the oversight of the SEC over digital assets.
To justify the move, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, would argue that the SEC was “…not concerned with labels, but rather the economic realities of an offering,” adding that this case’s “realities affirm that a number of the crypto assets at issue were securities.” Such rhetoric was swiftly countered by the Chief Legal Officer at Coinbase, Paul Grewal (no relation), who disputed the assertion. “Coinbase doesn’t list securities. Period,” he wrote in a tweet, later adding, “The DOJ reviewed the same facts and chose not to file securities fraud charges against those involved. ”
Although no one is disputing the unethical and criminal nature of the alleged actions, the legal implications of this case and the ongoing Cold war over the definitions could leave a massive imprint on the shape of any future legislation.
MiCA wish foundation
These developments in the US follow a broader push on the EU regulatory front to more clearly define the rules governing crypto asset providers and stablecoins. Published in September 2020, the EU Commission’s new proposal, “Market in Crypto-Assets Regulation” (MiCA), sets out to improve the digital resilience of the financial sector. The 168-page document envisions new powers for the European Securities and Markets Authority to restrict crypto platforms and stablecoins if they are deemed to threaten market integrity and financial stability or fail to protect retail investors.
Crucially, MiCA also covers insider trading and market manipulation on crypto trading platforms, making them unequivocally illegal — a previously-gray area that left ample wiggle room for unscrupulous traders. When the proposal is transcribed into law by 2024, as seems likely, the EU will have the world’s first comprehensive regulatory framework for digital assets. Such a move would put the union ahead of both the UK and the US in rolling out regulations governing crypto.
One thing is clear, with the regulators brandishing their sticks, the crackdown on unethical trading practices in crypto seems imminent. The best that the industry can do is to clean up its act on its own. The answer to insider trading in crypto is self-regulation, with all market participants keeping an eye on each other’s behavior to keep everyone in check. More advanced monitoring solutions, such as those developed by Lossless, will thus go a long way to clean up the DeFi industry without necessarily sacrificing the ethos of decentralization.
About Lossless
Restoring trust in web3 security. Lossless incorporates a new layer of blockchain transaction security, protecting projects and their communities from malicious exploits and the associated financial loss.
Lossless protocol implements an additional layer of blockchain transaction security for ERC-20 standard tokens, mitigating the financial impact of smart contract exploits and private key theft. Lossless protocol utilizes community-driven threat identification tools and a unique stake-based reporting system to identify suspicious transactions, providing real-time protection.
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