A former Coinbase employee and two others have been charged in what federal authorities described as the US government’s first cryptocurrency insider trading case.
Ishan Wahi, a product manager at the cryptocurrency exchange, and his brother Nikhil Wahi were arrested in Seattle on Thursday. They and a third defendant, their friend Sameer Ramani, who remains at large, also face civil charges from the US financial watchdog, the Securities and Exchange Commission (SEC).
Prosecutors alleged that Ishan Wahi, 32, shared confidential information about forthcoming announcements of new cryptocurrency assets that Coinbase was planning or considering listing on its exchange. His brother and Ramani allegedly traded at least 14 times before such announcements between June 2021 and April 2022, prosecutors said.
Nikhil Wahi, 26, and Ramani, 33, used anonymous ethereum blockchain wallets to acquire the assets before Coinbase’s announcements and then sold those assets for a profit of at least $1.5m (£1.25m), prosecutors claimed.
Damian Williams, the US attorney for the southern district of New York, said Web3 – the catch-all term for the latest iteration of the internet – was not immune from the authorities. Last month he brought an insider trading case against a former employee of OpenSea, the largest marketplace for non-fungible tokens (NFTs).
“Today’s charges are a further reminder that Web3 is not a law-free zone,” Williams said. “Just last month, I announced the first ever insider trading case involving NFTs, and today I announce the first ever insider trading case involving cryptocurrency markets. Our message with these charges is clear: fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street.”
Howard Fischer, a partner at New York law firm Moses & Singer, said the individuals had been charged with wire fraud – which refers to fraud committed on any kind of electronic device – because crypto assets are not technically defined as securities, which are tradable financial assets such as shares or bonds.
Historically, this has enabled crypto assets to swerve regulation by the SEC and the US treasury department, which has both enhanced the appeal of crypto assets while also making them more susceptible to fraud due to a lack of investor protections.
“It’s not an insider trading case because there is no such thing as insider trading for a non-security like a crypto asset, so the prosecutors have had to use wire fraud,” Fischer said.
In a blogpost, Coinbase’s CEO, Brian Armstrong, said the SEC’s decision to file securities fraud charges against the three men was an “unfortunate distraction”. Armstrong said Coinbase had flagged concerns about the three individuals to the Department of Justice.
“Coinbase takes allegations of improper use of company information very seriously, as demonstrated by our rapid investigation of this matter. Again, we have zero tolerance for this kind of misconduct and will not hesitate to take action against any employee when we find wrongdoing,” Armstrong said.
Fischer said the SEC was unlikely to be able to set a precedent on cryptocurrencies and securities with its civil charge.
“While the SEC has also filed a case, alleging that the assets involved are securities, because that prosecution is likely to be stayed pending the resolution of the criminal case, it is unlikely that this issue will be adjudicated.”
Andrew St Laurent, a lawyer for Ishan Wahi, declined to comment. A lawyer for Nikhil Wahi did not immediately respond to requests for comment. Reuters could not immediately identify a lawyer for Ramani.
