A former employee of the cryptocurrency exchange platform Coinbase and two others were charged by the U.S. Securities and Exchange Commission for alleged insider trading valued at more than $1.1 million, according to a lawsuit filed in U.S. District Court in Seattle Thursday.
This is the first insider-trading case involving cryptocurrency markets, prosecutors said.
"Fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street," U.S. attorney Damian Williams said in a news release.
Between June 2021-April 2022, former product manager Seattle-based Ishan Wahi as well as his brother Nikhil Wahi and close friend Sameer Ramani, traded crypto assets listed on Coinbase before at least 10 announcements and sold them for a profit, the lawsuit said. Ishan Wahi would tell the two men about the confidential announcements using a foreign phone, according to the lawsuit.
"The prices of crypto assets identified in these listing announcements, including crypto asset securities, typically appreciate quickly and significantly," the lawsuit said. In some cases, a token's value can increase 1,200% in a few months.
Coinbase CEO and co-founder Brian Armstrong said in a blog post the company investigated Ishan Wahi's activities and reported them to the U.S. Department of Justice, which indicted the three men for wire fraud and conspiracy to commit wire fraud Thursday. Ishan Wahi was fired, Armstrong said.
"We have zero tolerance for this and monitor for it, conducting investigations where appropriate with outside law firms," Armstrong said.
The suspicious activity started when a crypto-focused Twitter account tweeted that an Ethereum blockchain wallet "bought hundreds of thousands of dollars of tokens exclusively featured in the Coinbase Asset Listing post about 24 hours before it was published," which was trading caused by Ramani, the DOJ said.
Coinbase replied on Twitter that it had already begun investigating the matter and a few weeks later wrote in a blog post that any Coinbase employee who leaked confidential company information would be "immediately terminated and referred to relevant authorities (potentially for criminal prosecution)."
Armstrong also said the SEC's charges "are an unfortunate distraction from today's appropriate law enforcement action" since the SEC is suing the three men for securities fraud, and the cryptocurrencies they traded on are not considered securities. Instead, they are assets, Armstrong said.
The Thursday complaint marked the first time the SEC considered crypto tokens as securities for a fraud case.
The SEC determines assets are securities if the tokens were offered and sold to investors by issuers hoping to raise money, which they argue with the lawsuit is what the tokens should be considered.
"Coinbase does not list securities," Paul Grewal, Coinbase's chief legal officer, said in a blog post. "The SEC jumped directly to litigation. The SEC's charges put a spotlight on an important problem: the U.S. doesn't have a clear or workable regulatory framework for digital asset securities."
Coinbase's crypto lending program is under investigation by the SEC since it would constitute a type of investment activity that requires government protection.
The digital exchange service has been under pressure as its market capitalization has dropped from $226.08 last year to $73.98 today. Crypto has also been in a downturn, with bitcoin losing 50% in valuation this year.
The two brothers were arrested Thursday and were expected to appear in court in the afternoon. Ramani, who lives in Houston, is still at large, prosecutors said. Ishan Wahi attempted to flee the country before meeting with executives to discuss Coinbase's asset listing process at the Seattle office, according to the DOJ.
