As the legal debate over whether cryptocurrency sales constitute securities continues, all eyes have been on a lawsuit involving a Coinbase employee sharing inside information with his brother and friend. While the main defendant, former Coinbase employee Ishaan Wahi, and his brother have reached settlements with both the Department of Justice and the SEC, the friend — Sameer Ramani — remains at large.
On Friday, a federal judge in the Western District Court in Washington issued a ruling in the case against Ramani. The ruling, which partially granted the SEC's request for a default judgment, could have serious implications for both Ramani and the broader cryptocurrency industry.
In the decision, Judge Tana Lin ruled that the case fell within the SEC's jurisdiction because the cryptocurrency assets in question were securities, even though they were traded on Coinbase, a secondary market. As courts grapple with the question of when crypto assets are securities, the decision is the strongest yet by a federal judge to support Chairman Gary Gensler's argument that the vast majority of the industry's activity falls within its jurisdiction.
Hui and her discontent
Since the emergence of digital currencies like Bitcoin and Ether, regulators have grappled with how to classify digital assets. Do they fall under the category of securities such as bonds and stocks, or commodities such as gold and wheat?
Currently, the only cryptocurrency with regulatory clarity is Bitcoin, which the Commodity Futures Trading Commission declared a commodity in 2015. Other assets have remained in the gray area. As a result, when exchanges like Coinbase offer cryptocurrencies for trading, they operate under legal risk, despite stating their belief that some crypto assets should not be classified as securities.
Beginning with SEC Chairman Jay Clayton, and continuing under Gensler's leadership, the SEC has pursued a campaign of enforcement actions against cryptocurrency companies, arguing that the companies are issuing or selling unregistered securities. With high-profile cases against companies like Ripple, Coinbase, and Binance, the SEC has sought to expand its jurisdiction over the vast majority of crypto assets, taking advantage of the lack of legislative movement in Congress.
Federal judges in various cases so far have taken different positions on the securities issue, adding to the uncertainty. In July, Judge Analisa Torres in the Southern District of New York sent shockwaves through the industry when she issued a ruling in the long-awaited Ripple case, arguing that direct sales of its XRP tokens to institutional investors such as hedge funds constitute unregistered securities, while the sales Secondaries on platforms like exchanges do not.
Later that month, Judge Jed Rakoff, also of the Southern District of New York, disagreed with her reasoning. In a ruling denying a motion to dismiss by the defendants, a cryptocurrency company called Terraform Labs, he wrote that he rejected that approach.
“The Court refuses to distinguish between these currencies based on how they are sold, such that currencies sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not,” he wrote.
In December, Rakoff ruled in favor of the SEC and agreed that four crypto tokens offered by Terraform Labs constituted unregistered securities.
The matter has become more complicated in two high-profile lawsuits filed by the SEC against major cryptocurrency exchanges, Coinbase and Binance. Unlike Ripple and Terraform Labs, the question on the two exchanges only hinges on the tokens being traded on their venues, rather than the issuance.
Under US case law, the definition of an escrow is derived from a Supreme Court precedent called the Howey Test, which defined an escrow as investing money in a joint venture with the expectation of profits derived from the efforts of others. Both companies sought to have the cases dismissed, with their lawyers arguing that under the HUI, securities must include an actual investment contract, which does not exist when purchasing crypto assets on an exchange. A third exchange, Kraken, used the same reasoning when it sought to dismiss the SEC's lawsuit. The justices have yet to rule on the motions from Coinbase and Binance, and a hearing for Kraken's motion is scheduled for June.
Insider trading
The SEC's Coinbase insider trading lawsuit is a more complex case because none of the defendants are cryptocurrency companies, but instead, are individuals accused of using insider information for personal gain.
In two cases brought by the Securities and Exchange Commission and the Department of Justice, prosecutors argued that a Coinbase employee, Ishan Wahi, shared confidential information with his brother and friend, who netted more than $1.5 million from trades.
From the beginning, the SEC's lawsuit has alarmed the cryptocurrency industry. To determine jurisdiction for this case, the SEC argued that the defendants were trading unregistered securities on Coinbase — in this case, little-known tokens like AMP and DDX, not major cryptocurrencies like Ether and Solana. Prominent cryptocurrency companies, including Coinbase and Paradigm, have filed “friend of the court” briefs challenging the SEC.
Wahi and his brother settled with both the SEC and the Department of Justice, avoiding the risk of ruling in favor of the SEC on the issue of the security status of the tokens. That was not the case with their friend, Ramani, who the SEC believes is in India, prompting the agency to seek a default judgment in the case.
On Friday, Lin ruled in favor of the SEC, agreeing that sales of crypto assets constitute securities, even when sold on secondary markets. The tokens were widely promoted by issuers, thus creating an expectation of increased value, it said in its decision. Furthermore, issuers have facilitated trading on secondary trading markets such as Coinbase.
“The court’s analysis remains the same even to the extent that Ramani traded the tokens on
“Secondary market,” Lin wrote, arguing that promotional statements apply equally to tokens purchased by an investor, whether directly from the issuer or on a trading platform. “Each issuer has continued to make such representation regarding the profitability of its tokens even while the tokens are trading on secondary markets.”
As a result, Lin ruled that all of the cryptocurrency assets that Ramani purchased and traded constituted investment contracts. Unlike the Rakoff ruling in the Terraform case, the Lane decision is important because it involves secondary transactions, not direct sales by the issuer. At the same time, since it was a default judgment, there was no defense offered by the other side, as is the case with the SEC's lawsuits against major cryptocurrency exchanges.
Notably, the lawsuit is filed in the Western District Court of Washington, which is located in the same appellate district as the Kraken lawsuit, which is being litigated in the Northern District Court of California. If one case is appealed to circuit court, the three-judge panel's ruling will likely apply to the other case. Regardless, as multiple lawsuits are being heard in different circuits across the country, the question of whether crypto assets constitute securities will likely make its way to the Supreme Court.
SEC spokesman Ramani and Ramani's attorney did not immediately respond to a request for comment.
