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SEC Convicts Coinbase Employees of Illegal Securities Trading
Cuban warns of even greater crypto turmoil from US law enforcement regulations
Legal classification of cryptocurrencies a controversial topic
2022 has been a disastrous year for the crypto industry so far. The reduced risk appetite of investors in view of the rising key interest rates worldwide and the economic slowdown has hit not only tech stocks but also the crypto sector in particular. The market capitalization of all digital currencies combined has collapsed by around 2 billion US dollars – and has left a clear mark on the crypto wallets of small investors as well as on large crypto service companies. The crash of the popular Terra tokens UST and LUNA, the insolvency of the lending platform Celsius and the liquidity problems of the hedge fund Three Arrow Capital (3AC) speak volumes. In the meantime, the vast majority of cryptocurrencies have risen slightly from their lows for the year, but Mark Cuban senses a completely different danger.
SEC condemns Coinbase founders
The reason for Cuban’s latest warnings: The US securities and exchange commission (SEC) announced in a judgment at the end of July that nine cryptocurrencies listed on the crypto exchange Coinbase are unregistered securities. Earlier, the SEC, along with the U.S. Department of Justice, filed indictments against former Coinbase product manager Ishan Wahi and two others, accusing them of operating an insider trading scheme that netted them more than $1.1 million. As “The Street” reports, Wahi is said to have informed his brother Nikhil Wahi and his friend Sameer Ramani about upcoming token listing announcements by the crypto exchange, after which the three crypto investors are said to have illegally enriched themselves. The SEC wrote in a July 21 report that Nikhil Wahi and Ramani “in advance of these announcements, which typically resulted in increases in asset prices, […] allegedly bought at least 25 crypto assets, at least nine of which were securities. Then they usually sold them shortly after the announcements at a profit,” the US Securities and Exchange Commission quoted The Street as saying.
These said nine crypto assets are the following tokens: AMP by Flexa, RLY by Rally, DDX by DerivaDEX, XYO by XY Labs, RGT by Rari Capital, LCX by Liechtenstein Cryptoassets Exchange, POWR by Power, DFX Finance by DFX and KROM by Kromatika Finances. “Each of the nine companies invited investors to invest with a promise that in the future it would seek to increase the value of their investment,” the SEC said. This corresponds to the generally accepted definition of a security. The SEC wants to invoke the Supreme Court’s famous ruling, the so-called Howey test, which classifies an asset as a security if it meets certain criteria.
Coinbase is appealing the SEC ruling. The crypto exchange wrote in a blog post that it does not worship any securities. Coinbase thus strictly rejects the definition of cryptocurrencies as securities and speaks out against the corresponding legal consequences. Coinbase has filed a petition with the SEC to improve “digital asset rulemaking.” The SEC should disclose exactly how it would apply federal securities laws to crypto assets – thereby creating binding guidelines.
Cuban sees intention behind missing crypto guidelines
Cuban, who became a billionaire as an entrepreneur in the entertainment industry and who is best known to sports fans as the owner of the US basketball club Dallas Mavericks, has been criticizing the lack of clear legislation for digital currencies for years. On the occasion of the Coinbase case, he renewed his criticism via Twitter: “Do you think this is bad yet? Wait until you see what they come up with for token registration. This is the nightmare that is falling on the crypto industry How else can you employ thousands of lawyers and create a reason to ask for more taxpayers’ money?” he warned in a sarcastic undertone. The billionaire also linked a video from 2014 in which he played the message that the US Securities and Exchange Commission had left for him. Prior to that, he called the agency to find out if buying a stock he wanted would violate the Insider Trading Act. The video shows that the SEC never gave a clear answer to his question. Cuban wanted to prove that the SEC is intentionally vague in its rules. This accusation against the SEC can be heard throughout the crypto industry. The criticism is that the SEC does not want to adhere to clear boundaries when making judgments and thus wants to give itself greater flexibility in punishing crypto trades.
Think this is bad? Wait till you see what they come up with for registration of tokens. That’s the nightmare that’s waiting for the crypto industry. How else do you keep thousands of lawyers employed and create reasons to ask for more taxpayer money? https://t.co/eoDAiyDxlR https://t.co/mjr9LxnDZB
– Mark Cuban (@mcuban) July 23, 2022
Cryptocurrencies – Commodities or Securities?
The question of whether Bitcoin, Ether and Co. should be classified as commodities, foreign exchange or securities has been with the crypto world for several years. The way the tokens are classified has tangible legal consequences. So far, tokens have not been regarded as securities. This means that cryptocurrencies escape the rigorous oversight of regulators and are not subject to the same rules of financial transparency and disclosure as, for example, company shares. In addition, the admission procedure (ICO) is less strict than that of a security (IPO). In recent months, however, there have been accusations from the SEC accusing various crypto players such as Ripple or Terra founder Do Kwon of illegal insider sales. In most cases, the court cases are still ongoing, and crypto investors hope that the future judgments will provide more clarity regarding the legislation relating to Bitcoin and Co.
Garry Gensler, head of the SEC, also recently renewed his view in an interview that only bitcoin can legally be classified as a commodity – all other cryptocurrencies such as ether, on the other hand, are securities. Final legislation in this direction could indeed lead to turbulence in the crypto market, as Cuban fears.
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