The U.S. Securities and Exchange Commission (SEC) is attempting to create a “chilling effect” on the blockchain industry by labeling nine tokens at the center of an insider trading case as securities, but not giving the token creators a chance to defend themselves.
Last year, the SEC lodged a complaint against former Coinbase manager Ishan Wahi for tipping off his brother and close friend regarding new listings of tokens on Coinbase. Earlier this month, Wahi pleaded guilty to insider trading charges, changing his plea from not guilty. Wahi is still contesting the securities fraud charges.
The tokens in question include AMP, XYO, LCX, POWR, RLY, RGT, DDX, DFX, and KROM. Data from CoinGecko indicates that these tokens trade in relatively thin volume, and don’t rank within the top 150 tokens the service tracks.
In court, Wahi’s lawyers have argued that these tokens are not securities, and therefore he cannot be charged for securities fraud.
The Blockchain Association, a Washington-based crypto lobbying organization, is seeking to advance that argument by saying that the SEC is engaging in “absentee enforcement” as the token creators are not linked to the case, nor, by statute, can they intervene or be otherwise heard.
“Such behavior is improper for a government agency, and is irreconcilable with due process concerns,” the docket reads. “The SEC’s motive, then, is merely to backdoor a precedent that can be used in other cases, as, indeed, it is already doing in other cases where the DOJ has brought an action, and the SEC has piled on with similar allegations of securities laws violations against absent third parties.”
In late December, the SEC called FTX’s former exchange token FTT a security in a complaint against FTX co-founder Gary Wang and former Alameda Research CEO Caroline Ellison. Neither Ellison nor Wang contested the complaint as part of a plea agreement.
“Rather than pursue proper rulemaking under the [Administrative Procedure Act] to address those issues, the SEC has instead issued a long history of inconsistent, incomplete, and confusing public statements, and has pursued a pattern of “regulation by enforcement,” the docket reads. “Now, the SEC extends its doctrine of ‘regulation by enforcement’ to ‘regulation by unchallengeable allegation’.
The Administrative Procedure Act (APA) is statute that outlines the procedures of administrative law, and how federal administrative agencies make rules and adjudicate.
The docket outlines in considerable detail, naming prior cases, how digital asset laws, and prior enforcement by the SEC, make the U.S. an opaque and confusing jurisdiction to do business in for the digital assets industry. All the while, there have been material changes to the tokens’ value because of the SEC’s actions.
“The SEC’s pronouncement that a particular token is a security has also already resulted in delisting from cryptocurrency trading platforms,” the docket reads, pointing to a delisting of one of the tokens by Binance.US out of an “abundance of caution.”
Wahi is due back in court on April 6. Wahi’s lawyers have filed a motion to dismiss the SEC’s complaint regarding securities fraud, by arguing the tokens in question are not securities, while still pleading guilty to insider trading and other charges.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.