Is Coinbase Losing? Wahi is the 6th win for the SEC; will Coinbase be the 7th?
Don’t be fooled by the bull.
For the past nine months the crypto industry has been on the losing end of the litigation battle, with clear signals emerging as to the fate of Coinbase, and potentially, the industry as a whole. Since July, the courts have concluded on six occasions that transactions involving cryptocurrencies and other digital assets are unregistered securities. What makes the Wahi case unique, and most concerning for the fate of Coinbase is that this case is the first where a secondary transaction, rather than the initial sale of the security has been deemed to be a securities transaction.
At issue in Coinbase is the question of whether Coinbase is in the business of facilitating unlicensed transactions of Unregistered securities.
TLDR:
SEC v. Ripple
Key Takeaway: Judge Torres determined that the sale of XRP, a cryptocurrency, to sophisticated investors was an investment contract transaction, an unregistered securities transaction, but was silent as to whether the tokens themselves were unregistered securities.
SEC v. Terraform Labs
Key Takeaway: Judge Rakoff determined that UST, LUNA, and MIR, were unregistered securities. The case focused on the primary sale of securities between the issuer and the buyer, not on secondary transactions.
SEC v. Wahi
Key Takeaway: Judge Lin determined that the sale of cryptocurrencies by an individual with insider information regarding token listing on Coinbase was insider trading in securities. Meaning that secondary transactions of cryptocurrencies can be securities transactions.
Conclusion: Cryptocurrencies that are unregistered securities that are sold in secondary transactions need to be registered with the SEC
The Ripple Case: Setting the Stage
The Ripple case marked an important moment in cryptocurrency litigation. Judge Torres identified transactions involving the sale of cryptocurrencies to sophisticated and primarily institutional investors as investment contract transactions. However, the decision stopped short of classifying the tokens themselves as securities or investment contracts, leaving a significant area of the law unaddressed.
Additionally, Judge Torres did not comment on whether secondary transactions involving cryptocurrencies could be considered securities transactions, primarily due to jurisdictional constraints. This omission left a gap in the legal framework surrounding digital assets traded on secondary markets.
Terraform: Expanding the Scope
Following the Ripple case, Judge Rakoff in the Terraform litigation took a step further by determining that various forms of cryptocurrencies sold during primary issuance are indeed securities. This ruling encompassed a broad spectrum of digital assets, including governance tokens, traditional fungible tokens, and stablecoins, thereby broadening the definition of what constitutes security in the digital age.
SEC vs. Coinbase: The Ongoing Battle
Amidst these evolving legal interpretations, the SEC's litigation against Coinbase has brought to the forefront the issue of whether various tokens traded on the platform constitute unregistered securities. This case is particularly significant, as it suggests that a major cryptocurrency exchange could be facilitating the sale of unregistered securities, highlighting the need for clearer regulatory guidance.
The Wahi Case: A Novel Perspective
The case against Ishan Wahi introduces a novel dimension to the legal scrutiny of cryptocurrencies. Despite being a default judgment, the court's decision to hold individuals liable for insider trading on cryptocurrencies signifies that digital assets involved in secondary transactions can indeed be considered securities. This finding is critical as it implies that platforms facilitating such transactions, like Coinbase, might be dealing in unregistered securities.
Implications for the Cryptocurrency Industry
The cumulative effect of these decisions signals a paradigm shift in how cryptocurrencies are regulated. The industry is now faced with the reality that digital assets, depending on their sale and trading practices, can fall within the ambit of securities law, thus necessitating compliance with the rigorous standards set forth by the Securities Act of 1933 and the Securities Exchange Act of 1934.
Conclusion
As the legal landscape continues to evolve, the cryptocurrency industry must adapt to the increasing regulatory scrutiny. The recent court rulings serve as a reminder of the importance of compliance and the potential legal and operational challenges that lie ahead for platforms and issuers of digital assets. For legal practitioners and stakeholders in the crypto space, understanding these developments is crucial for navigating the complexities of securities law in the digital age.
