U.S. court rules in favor of labeling certain crypto assets as securities, delivering blow to ex-Coinbase staff

A federal judge has issued a groundbreaking ruling in support of the Securities and Exchange Commission’s (SEC) stance that certain cryptocurrencies are securities, even when traded on secondary markets. The ruling, which came as part of the SEC’s case against a former Coinbase employee for insider trading, has further fueled the ongoing debate surrounding the classification of crypto assets.

The case brought by the SEC has added a new layer of complexity to the already uncertain regulatory landscape for cryptocurrencies in the United States. Unlike previous cases that focused on crypto firms, this case involved individuals accused of insider trading.

Ishan Wahi, a former Coinbase employee, was found to have shared confidential information with his brother Nikhil Wahi and friend Sameer Ramani, who is currently at large. The SEC argues that the defendants traded unregistered securities on Coinbase, specifically lesser-known tokens like AMP and DDX.

While Wahi and his brother have already settled with the SEC and the Department of Justice (DOJ), avoiding a judge’s ruling on the security status of the tokens, Ramani’s absence has added a new twist to the lawsuit. This has resulted in a default judgment by Judge Tana Lin of the United States District Court for the Western District of Washington, declaring every crypto asset traded by Ramani on Coinbase as an investment contract, even in secondary transactions.

The SEC relies on the “Howey Test,” which dates back to a 1946 Supreme Court case involving the sale of plots in citrus groves, to determine whether a financial instrument can be considered a security. This test considers four factors and is still widely used to determine the status of virtual currencies.

While Bitcoin has been classified as a commodity since 2015, providing regulatory clarity, other cryptocurrencies remain undefined, posing legal and regulatory risks for centralized exchanges.

Under the leadership of Jay Clayton and Gary Gensler, the SEC has increased its enforcement actions against cryptocurrency companies, accusing them of issuing or selling unregistered securities. However, with no significant progress in legislation, industry leaders such as Ripple, Binance, and Coinbase have faced increased scrutiny from regulators.

Federal judges in the United States have offered differing perspectives on the securities question, contributing to regulatory uncertainty. In a noteworthy ruling last year, Judge Analisa Torres of the U.S. District Court for the Southern District of New York determined that direct sales of Ripple’s XRP token to institutional investors constituted unregistered securities, while secondary sales on exchanges did not. However, Judge Jed Rakoff disagreed with this approach, arguing that a distinction based on the manner of sale was unwarranted.

This complexity is further highlighted in lawsuits against major crypto exchanges Coinbase and Binance, where the focus is solely on token trading on their platforms. The judges have yet to rule on motions filed by these exchanges, adding even more suspense to an already intricate legal landscape.