US Court Deems Cryptocurrency Trading as Securities Transactions

In an in absentia ruling on an insider trading case involving Coinbase, a US court determined that trading certain crypto assets on secondary markets constitutes securities transactions.

In July 2022, authorities arrested former Coinbase product manager Ishan Wahi and his brother Nikhil, accusing them of insider trading fraud. Samir Ramani, a close friend of the ex-manager, also became a case figure but evaded investigation.

In early 2023, the brothers pleaded guilty and settled claims with the US Securities and Exchange Commission (SEC) in May.

The agency initiated an in absentia case against Ramani. The court agreed, noting in its decision that the accused “appears to have fled the country to avoid prosecution.”

Regarding the tokens traded by Ramani using information from Ishan Wahi, the court sided with the SEC, recognizing them as securities.

According to the statement, asset issuers attracted investors with potential profits. Projects promoted their offerings via social media, including claims that:

• the value of the coins would increase;
• holders would have opportunities for additional rewards and other benefits;
• teams were taking steps to enhance coin value, including limiting market supply.

“Each issuer continued to make such statements about the profitability of their tokens, even when they were traded on secondary markets. Thus, according to the Howey test, all crypto assets that Ramani bought and sold were investment contracts,” ruled Judge Tana Lin. 

This is not the first instance where the SEC Chairman Gary Gensler’s classification of virtual assets has been upheld by the court. The agency’s head has repeatedly stated that almost all cryptocurrencies are securities.

US Judges Remain Divided

In July 2023, Judge Analisa Torres ruled that programmatic sales and other distributions of Ripple’s XRP token did not constitute an offer and sale of investment contracts. However, the decision stated that selling coins to major players violated US securities laws. 

In December, Judge Jed Rakoff, overseeing the SEC’s case against Terraform Labs, rejected Torres’s approach. He opined that the company offered and sold securities in the form of UST, LUNA, wLUNA, and MIR tokens. The defendants attempted to appeal to precedent, but Rakoff found their arguments unconvincing.

Previously, former SEC attorney John Reed Stark described Torres’s verdict in the Ripple case as “on shaky ground.” He assessed the chances of a successful appeal in higher courts as high.

Since March 2023, the Commission has filed civil suits, including allegations of unregistered offerings of investment contracts in the form of cryptocurrencies, against several exchanges like Beaxy, Bittrex, Binance, and Coinbase. In November, the regulator filed claims against Kraken.

In a motion to dismiss the lawsuit, the bitcoin exchange stated that the agency cannot reasonably assert that the digital tokens traded on its platform are securities.

“Instead of identifying securities, the complaint asks the court to support a theory that an investment contract can exist without a contract, without post-sale obligations, or even without interaction between the issuer and the buyer,” stated Kraken CEO Dave Ripley.

In August, as part of enforcement actions against Impact Theory, the SEC for the first time classified NFTs as investment contracts. The firm admitted guilt, agreed to pay $6.1 million in fines and interest, destroy remaining tokens in its possession, and forgo all royalties.

Regarding Ramani, the court ordered him to return $817,602 in illicit insider trading profits and pay a $1.6 million fine. Judge Lin rejected the Commission’s request to impose interest on the restitution.

SEC Commissioner Hester Peirce has advocated for easing enforcement and regulation of crypto assets by the agency.