DeFi & Cryptocurrency Industry Difficulty with Crypto Insider Trading
An ex-Coinbase product manager and two others were charged with insider trading by the SEC after they allegedly traded before the company announced that certain cryptocurrencies would be accessible for trading.
The DOJ’s case against Coinbase for wire fraud has strong merit, since wire fraud may occur whether or not the assets at issue are stocks. The SEC’s accusations against nine token projects are a source of concern for the sector as a whole.
When the SEC files action against nine cryptocurrencies, the platforms and the projects that launched the cryptocurrencies are backed into a corner, with little recourse to defend themselves and potentially damaging court rulings looming over them.
The SEC’s lawsuit against nine tokens encompasses a wide range of sub-asset classes within the digital asset ecosystem, and it foreshadows difficulties for the whole digital asset business by drawing on elements shared by numerous projects.
It seems from the SEC’s complaint that the agency will not be convinced by attempts to establish real decentralization through governance tokens if more than a de minimis amount of tokens are held by the core development team.
The SEC requires the presence of staking, liquidity pool tokens, and yield farming to prove the existence of a common business and a reasonable expectation of profits, even if these characteristics are often taken to reflect the tokens’ usefulness.
Without regard to applicable provisions of corporate law, disregarding jurisdictional considerations, and conflating platforms and protocols with for-profit corporations and LLCs, foundation and other non-stock entities, and unincorporated entities, the SEC describes offshore DAO structures as a single entity in its complaint.
The SEC alleges that comments highlighting the capacity of buyers to resale tokens in secondary markets are “a critical enticement to investors” and “important to the market” for crypto assets, and that these representations violated federal securities laws.
The result of the SEC’s lawsuit against nine crypto asset issuers is expected to have repercussions well beyond the defendants in the case and to be used to support enforcement proceedings against bigger and more established actors in the market.
There is a possibility that the SEC may use a criminal wire fraud prosecution as leverage in a civil insider trading action.