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This week in crypto was marked by major investigations into the US’ two largest exchanges, a resurgent debate over the legal status of crypto-assets and some tinkering from Janet Yellen on a significant US stablecoin bill.
On July 21, the US Securities and Exchange Commission (SEC) charged Ishan Wahi, a former product manager at Coinbase, and two others with insider trading — the first case of its kind in crypto.
In another first case of its kind, the Department of Justice (DOJ) also filed concurrent criminal charges against the trio, alleging wire fraud and wire fraud conspiracy.
According to court filings, Ishan, his younger brother Nikhil and mutual friend Sameer Ramani made more than $1.1m in illicit profits by front-running Coinbase listing announcements.
From at least June 2021 to April 2022, Ishan is believed to have repeatedly tipped off Nikhil and Ramani with the timing and content of Coinbase listing announcements before they went public.
As noted by the SEC, Coinbase treats such listing announcements as strictly confidential, and warns against employees trading on them or revealing them to others.
However, the Wahi brothers and Ramani allegedly ran the same scheme with at least 25 different crypto-assets, buying them shortly before a listing announcement and selling them shortly afterwards at a higher price.
According to the SEC, at least nine of these crypto-assets meet the definition of a “security” under the 1933 Securities Act.
Specifically, the SEC argues that by purchasing these crypto-assets, the buyer enters into an “investment contract” in a common enterprise, and with a reasonable expectation of profit derived from the effort of others.
Coinbase hits back
Although it cooperated with the two investigations, Coinbase was not informed when or if any charges would be made public.
Nonetheless, Coinbase fired back immediately on July 21, publishing a blog post entitled "Coinbase does not list securities. End of story.".
In the post, Coinbase chief legal officer Paul Grewal writes that the SEC is effectively practising “regulation by enforcement” in its decision to view the nine crypto-assets as securities.
“The SEC’s charges put a spotlight on an important problem: the US doesn’t have a clear or workable regulatory framework for digital asset securities,” said Grewal.
“And instead of crafting tailored rules in an inclusive and transparent way, the SEC is relying on these types of one-off enforcement actions to try to bring all digital assets into its jurisdiction, even those assets that are not securities.”
This view was echoed by Caroline Pham, head of the Commodity Futures Trading Commission (CTFC), who published her own statement opposing the SEC’s judgment on the securities question.
At the same time, Coinbase has filed a petition for rule-making with the SEC, in the hope of building a viable regulatory framework for crypto-asset security markets.
“We worry that today’s charges suggest the SEC has little interest in this most fundamental role of regulators,” Grewal added.
“We remain eager to share our perspective with the SEC, especially through a formal rule-making process desperately needed.”
Another Iranian headache
Meanwhile at Kraken, the US’ second largest crypto exchange, the company is bracing itself for impact following a likely US Treasury investigation into alleged sanctions busting.
According to a report by the New York Times, the Treasury’s Office of Foreign Assets Control (OFAC) has been investigating Kraken since 2019 for serving customers in Iran, and is expected to impose fines on the exchange in the near future.
The New York Times spoke with five people “affiliated with the company or with knowledge of the inquiry”, but all five declined to be identified due to “fear of retribution”.
If the five sources are correct, Kraken will become the largest US crypto firm to date to face enforcement action related to Iranian sanctions.
In response, a Treasury spokeswoman said she could not “confirm or comment” on potential or ongoing investigations, while Kraken’s chief legal officer said the company “closely monitors” compliance with sanctions laws.
In a previous Week In Crypto, VIXIO noted that Binance was accused of serving customers from Iran between 2018 and 2021.
In a similar story based on anonymous allegations, Binance is alleged to have served seven Iranian customers in violation of US sanctions — an allegation CEO Changpeng Zhao took issue with.
Zhao goes on media offensive
This week, Zhao was embroiled in another media dust-up, this time with a publisher in Hong Kong.
On Monday (July 25), Zhao filed defamation charges against Modern Media, the Hong Kong publisher of Bloomberg Businessweek.
In the lawsuit, Zhao alleges malice in the Chinese translation of an article that described him as running a “Ponzi scheme”.
On June 23, Bloomberg Businessweek published a profile of Zhao in English entitled "Can Crypto’s Richest Man Stand the Cold?".
But in Hong Kong, Modern Media opted for the headline "Zhao Chagpeng’s Ponzi scheme".
Zhao has demanded a retraction and called for paper copies to be removed from news-stands, a request that Modern Media has already partly complied with, according to CoinDesk.
FTX eyes Korean exchange
While Binance is bogged down in defamation suits in Hong Kong, its main rival FTX appears to be continuing its shopping spree, as previously reported by VIXIO.
According to a report from CNBC, the next company in FTX’s crosshairs is Bithumb, South Korea’s second largest exchange by volume and globally one of the top 20 or top 30 exchanges.
Vidente, owner of Bithumb, told CNBC it has held discussions about a possible sale of its stake to FTX.
The move would be significant if completed, given the popularity of crypto trading in South Korea, and the higher regulatory standards applied in South Korea than in other jurisdictions in Asia.
Last year, at the height of the crypto bull market, South Korea saw a statistically significant rise in the number of young people quitting their jobs to trade crypto full time.
The brain drain first hit major corporations such as Samsung and LG Electronics and, by the end of the year, so many public officials were defecting to the crypto industry that politicians began to call for stricter rules against crypto poaching.
Stablecoin bill continues to puzzle
Meanwhile, back in Washington, D.C., the excitement of the unfolding yoyo crypto market has now given way to the sombre task of regulating the industry — a puzzle that is not quite so easily solved in the US at least.
This week, a US stablecoin bill was put on hold due to a late intervention by Janet Yellen, secretary of the Treasury.
According to sources quoted by Reuters and Politico, Yellen is seeking changes to the bill that would require digital wallet providers to keep customer assets segregated, therefore ensuring their preservation in the event of insolvency.
The delay will push back the timeline for when the bill is introduced to Congress until September, following the one-month summer recess period in August.
Other sections of the bill would give banks the ability to issue their own stablecoins, while non-bank issuers would come under the oversight of the Federal Reserve.
The full draft text of the bill is not yet known, but industry groups, such as the Independent Community Bankers of America (ICBA), have seen parts of it, and have likewise requested further consideration.
“Legislation is urgently needed to address the emerging systemic risk created by a proliferation of unregulated stablecoins,” the ICBA said in a letter to the committee.
“However, we believe that it would be premature to markup [introduce] legislation of this scope and scale without the benefit of full review and comment from ICBA and other stakeholders.”
