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While insider trading violations are a headache, US market regulators are probing Coinbase for something that could make things significantly worse

Tokenised is your weekly read to navigate and mine the rich vein of crypto developments that flow through India and Southeast Asia. Someone sent you this? Sign up here

Good Evening [%first_name |Dear Reader%],

Welcome to this week’s edition of Tokenised.

Before I say anything else, you should know that I do not condone trading on insider information. It’s illegal, unethical, and it erodes fairness and trust in financial markets. 

But if you don’t care about any of that and have made up your mind to be a fraud and face possible fines and/or jail time, there’s a few things you should avoid: 

  1. Leaking information from a close-knit messaging group you’re part of. Because, well, electronic records.
  2. Passing said information to your brother and a friend. 
  3. Repeating this 14 times.
  4. And when you feel that the hounds might be onto you, inventing a fake health issue with your father to try and escape the country.

All of these steps (combined with a few others) have led to the filing of the first insider trading case involving crypto tokens in the United States. 

Three individuals—including a former employee of crypto exchange Coinbase, Ishan Wahi—were charged last week with passing and trading on insider information about assets Coinbase was planning to list. 

In total, during the course of the scheme, Nikhil Wahi [Ishaan’s brother] and [Sameer] Ramani [Ishaan’s friend] collectively caused purchases of at least 25 crypto assets in advance of at least 14 seperate Coinbase crypto asset listing announcements. As a result of the insider trading scheme, Nikhil Wahi and Ramani collectively generated realised and unrealised gains totalling at least approximately US$1.5 million.

Just for background, listing a token on Coinbase is the equivalent of listing a stock on the New York Stock Exchange. It brings with itself something referred to as ‘Coinbase pop’, wherein a listing on the exchange typically boosts prices of the token—for a while—and brings sufficient liquidity to be able to cash out of it. 

As a product manager at Coinbase between October 2020 and May 2022, Ishan Wahi was part of a close-knit messaging group of Coinbase employees that determined when listings would be announced. And with access to this insider information, Wahi could guide his brother and friend on when exactly to buy these tokens. 

For instance, in August 2021, Ishan Wahi learned that Coinbase was planning to list the XYO token. Wahi tipped Ramani off about the plans. Ramani then purchased US$610,000 worth of the token. Following the Coinbase listing announcement on 8 September, 2021, the price of XYO jumped up sharply, netting Ramani gains worth nearly US$900,000. 

That’s just one of these instances, but the others followed a pretty similar script. Wahi would learn about a listing via his job and tip off his brother or friend. They would then buy the token ahead of the listing and sell once it was announced. A neat little profit machine. 

While brother Wahi and Ramani used anonymous wallets to scoop up the tokens, blockchain analytics and links to their IP addresses got them caught in the end. Both Wahis have since been arrested, but Ramani remains at large. 

Quote
Our message with these charges is clear: fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street.
U.S. Attorney Damian Williams while announcing the charges

Just last month, the US authorities also announced charges related to insider trading in non-fungible tokens (NFT) which followed a pretty familiar script. An employee knew which assets would be featured by OpenSea—an NFT marketplace—and used that information to make money by scooping them up in advance. 

As far as insider trading goes, this case seems pretty vanilla and almost amateurish(?). The risks far outweighed the rewards, and the accused seem to have made little attempt to hide their tracks. When Coinbase summoned Wahi for an internal review, he said he had to leave for India because his father was unwell and hence wouldn’t be able to attend the meeting. 

Even though he told coworkers he was already on the flight, Wahi was arrested by authorities at the airport and seemed to be leaving for good, going by the amount of stuff with him. Both Wahis are Indian citizens while Ramani, a US citizen, is currently believed to be in India, according to the US market regulator’s complaint

But even beyond the insider trading charges, the US markets regulator has thrown a curveball at Coinbase that could be more worrying than a compliance headache due to the insider trading case. 

Is it a token? Is it a security?

While the US Justice department—a division responsible for enforcing federal law—referred to the tokens involved in insider trading as “crypto assets”, the Securities and Exchange Commission (SEC)—the markets regulator—went a step further and called them crypto asset securities

“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. Rest assured, we’ll continue to ensure a level playing field for investors, regardless of the label placed on the securities involved,” Gurbir S Grewal, Director of the SEC’s Division of Enforcement, said in a statement announcing the insider trading charges. 

Now, if the SEC takes this to its logical conclusion and states that Coinbase is responsible for listing unregistered securities, it could spell a lot more trouble for the firm and put it directly on the hook. 

And from the looks of it, those wheels are in motion already. 

Bloomberg reported yesterday that Coinbase is facing a probe into whether it allowed Americans to trade in unregistered securities, citing three individuals familiar with the matter. Coinbase stock lost over one-fifth of its value after the report came out. 

It currently trades at US$53 a share after having listed at US$342 per share in April 2021. While this is pretty clearly an oblique approach by the SEC to showing its hand, if the investigation does conclude that unregistered securities are at play, things could get much worse for Coinbase. And sharing its fate side by side could be venture capital firms that have invested in these unregistered securities. 

With that, let’s turn to some other things that happened in crypto over the last few days. 

Crispy bytes

  • Asia-focused crypto exchange Zipmex is looking to raise at least US$50 million to repair its balance sheet after halting customer withdrawals last week. [Bloomberg] 
  • Tesla has liquidated 75% of its bitcoin holdings. [TechCrunch]
  • Crypto exchange Blockchain.com is laying off 25% of its staff. [The Wall Street Journal] 
  • Kraken, a leading crypto exchange based in the United States, is being investigated for facilitating suspected violations of sanctions. [The New York Times] 
  • China’s digital currency will respect privacy and protect user information, according to officials at the country’s central bank. [Reuters] 
  • Indonesia is planning to issue a wholesale digital currency to improve inter-bank transfers. [Bloomberg]

That’s all for this week’s edition. If you have any overarching thoughts (or even nitpicky ones) about this newsletter, please do write to me at [email protected].

I’ll see you again next week. Take care!

Regards,

Jaspreet Kalra

This newsletter has been discontinued. But you can read The Stack which includes our newsletters around cleantech, fintech, personal finance and e-commerce in India!