In an unprecedented enforcement action, the U.S. Securities and Exchange Commission (SEC) brought insider trading charges against a former Coinbase manager and two others related to buying 25 tokens ahead of Coinbase's listing announcements for the tokens. This action by the SEC is the first of its kind against the affiliates of a major digital asset intermediary in the United States, and suggests the SEC may be ramping up regulatory and enforcement efforts against digital asset exchanges, in line with SEC Chair Gary Gensler's public pronouncements regarding the need to regulate digital asset exchanges.
The Complaint, filed in a federal district court in Seattle, exemplifies Chair Gensler's views that many, and perhaps most, publicly traded digital assets are securities, and that intermediaries in the digital asset markets should be subject to securities regulation—irrespective of whether they hold themselves out as transacting in securities. In the words of Gurbir S. Grewal, director of the SEC's Division of Enforcement, "We are not concerned with labels, but rather the economic realities of an offering. In this case, those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase."1
The Complaint charges the three with violating the antifraud provisions of the securities laws and seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties. The U.S. Attorney's Office for the Southern District of New York has also filed criminal charges against the three.
The SEC's action follows a recent Department of Justice insider trading case against the employee of a platform for non-fungible tokens, or NFTs, and may be the result of an investigation the SEC has been conducting into insider trading at digital asset exchanges. Together, these recent actions suggest regulators are significantly increasing enforcement and efforts against digital asset market intermediaries.
Unlike many earlier enforcement actions, the SEC's Complaint specifically identifies "at least nine" of the 25 tokens as securities—AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, and KROM. The Complaint leaves open the possibility that the other 16 tokens may not be securities, though it does not identify them.
In the near term, and until the enforcement action is resolved, the Complaint will likely create significant uncertainty regarding the security status of these nine assets and may prompt some U.S. crypto market participants to restrict their trading. However, irrespective of the regulatory status of individual digital assets, the SEC's action likely foreshadows a significant new trend—increasingly greater regulatory scrutiny of digital asset exchanges, even those that claim not to transact in securities.
For more information about this SEC enforcement action or its implications, please contact Wilson Sonsini attorneys Amy Caiazza, Neel Maitra, or another member of Wilson Sonsini's fintech and financial services practice group.
[1] See U.S. Securities and Exchange Commission Press Release (July 21, 2022), available at https://www.sec.gov/news/press-release/2022-127.