- Like any good finance story,
this one begins with fraud.
But not just any fraud, because this fraud
helped shed light on a huge conflict that
could change the crypto world forever.
To begin, you need to know who Coinbase is.
They're America's largest crypto exchange.
And naturally, when a new coin gets
added to their platform, it's a big deal.
The coins are now tradable
by millions of new investors.
Interest surges, and so does the price.
So with influence like this, it's only natural
that someone tries to profit off of it.
And yes, this is where things get fraudy.
Imagine you're working at Coinbase.
You're part of their private chats, giving you
the inside scoop into which coins are going
to be listed way before anyone else.
That would be pretty useful information, right?
Because theoretically, you'd be able to invest heavily into
these coins before their listing, before the new wave
of investors pumped the price up, and you'd be
guaranteed to make a boatload of cash.
It's a bulletproof plan.
Except you can't do it yourself. It'd be too obvious.
I mean, you work for the company. You'd get caught.
So what can you do?
Let's think about this.
How can you outsmart the company,
remain anonymous, and still make fat stacks?
You got it.
Instead of you investing,
just tip off your brother and your friend. Genius.
No one will ever catch you and
you're going to make a killing.
This is exactly what authorities
think happened at Coinbase.
Charges filed state that an ex-Coinbase employee,
Ishan Wahi, was tipping off his brother and
his friend and then used that information to
trade tokens for almost a year.
According to a Justice Department press release,
the Coinbase employee, on at least 14 occasions,
passed off these tips.
And the way he did it was too simple.
Ishan had access to private Coinbase message channels
detailing the token releases.
This was incredibly rare and valuable information.
Using this information, the three men
used anonymous blockchain wallets to acquire
the coins before Coinbase listed them.
Once the price had pumped, they then sold for a profit.
The result, around $1.5 million in gains.
This was a big deal, and
they covered their tracks well.
But of course, not perfectly.
Purchases were done through accounts held in
other people's names, and funds were transferred
through multiple anonymous blockchain wallets.
And to top this off, the three of
them kept on creating new wallets with
zero transaction history to keep their scheme concealed.
And they would have gotten away with it too,
if it weren't for those meddling blockchain snoops.
One of their large trades got spotted by Twitter.
They were getting attention and Coinbase took notice.
Coinbase needed to find the pest among them,
and it didn't take long.
Ishan was requested to have a little
sit down with Coinbase's director of security operations,
and the gig was up.
So what does Ishan do in the situation?
Face the music? Risk getting caught? Run?
Yeah, that.
He attempts to board a plane to India,
only to be caught by authorities and forced to face justice.
xD
This was the first time anyone had
ever been charged with cryptocurrency insider trading.
And the message from authorities was pretty clear.
US Attorney Damian Williams said
But while wire fraud and around $1.5 million
in questionable profits sounds exciting, there's a little detail
of this story that, as I said at the start of this video,
could potentially change everything for Coinbase,
and maybe crypto itself.
Because...
and while they didn't accuse Coinbase themselves of
any wrongdoing in this wire fraud, they did
say something that Coinbase was not okay with.
And what was this terrible statement?
The SEC said when it looked at the
fraudulent trades, it figured out that seven of
the tokens listed on Coinbase were actually securities.
Seemingly harmless statement right?
Wrong.
And regulation is bad for the crypto business.
I don't know if you've noticed this, but
the crypto community in general really doesn't like
rules or authority of any conceivable kind.
So Coinbase responded to the SEC's pushing and
shoving with some fighting of their own.
And how do you respond if you're a successful,
publicly traded platform looking to battle with the US Government?
You write a strongly worded blog post.
I'm serious.
That's what they did.
The blog post was titled
"Coinbase does not list securities. End of story."
The post pointed out that the
Department of Justice, which received the same facts, didn't file
any security fraud charges against Coinbase.
And they also referenced a statement
describing the SEC's actions as a
striking example of regulation by enforcement.
A bit of a no no.
They went on to state that before
they list any tokens on their platform,
they analyzed whether each digital asset could
potentially be considered a security,
a process the SEC itself has looked over before.
They say that most of the tokens
they review don't get listed on their platform
and that they didn't stop there.
Coinbase stated that the SEC was
essentially doing this on purpose.
They're purposely creating hard to follow
rules for a particular reason -
The SEC wants to bring all digital assets
under its jurisdiction, even the assets that aren't
actually securities, which is their jurisdiction.
But why?
Because it means their departments get
more funding and more power.
So, yeah, Coinbase gave the SEC the good old middle finger
in a blog post
from the safety of their corporate offices,
but a finger nonetheless.
And then they followed up that finger with
another identical twin when they filed a petition
for rulemaking, essentially arguing that modern securities law,
which was largely written in the 1930s, wasn't
made with digital assets in mind, given that
digital assets weren't even a thing back then.
And on top of this, crypto markets
don't even behave like regular markets.
Places like the New York Stock Exchange have
set hours where trading can take place.
But crypto is no rules, balls of the walls,
trading 24 hours a day, seven days per week.
And trades happen instantly.
Crypto doesn't require intermediaries.
Users can take tokens like Stablecoins and
use them to buy other cryptos.
There aren't any rules that currently
exist for this kind of trading.
Nothing exists.
So taking the old rules for securities and
slapping them on digital assets won't work,
at least without causing some kind of other issues.
OK, so a fairly sound argument from Coinbase, but
We need to understand both sides of the argument.
Well, in Washington, there's been a growing demand
for regulators to get involved with crypto.
This outcry has only gotten louder since
the bear market and all of these crypto platform collapses,
for good reason.
SEC Chair Gary Gensler has stated that Coinbase
and other platforms like it need to take
more action to protect retail investors.
Again, another thing that makes sense, he's also
argued for a long time that a lot
of cryptocurrencies should be registered with the SEC.
The SEC basically considers a token of security
In business, this is really simple.
You invest money in a management team who
you think will make you more money, and
their efforts will make you that money.
The ones that you should worry about are the
tokens that somehow pay you profits from a business.
This is commonly done through
That's where my radar goes off a little bit.
But despite this,
And the recent tussle between Coinbase and the SEC
isn't the first time these two have clashed heads.
When Coinbase first went public, its first quarter
earnings report included a comment that it had
received investigative subpoenas from the SEC for documents
and information about certain customer programs, operations, and
intended future products, including the company's stablecoin
and yield generating products.
These investigations came to a head when the
SEC actually caused Coinbase to back down with
its tail between its legs in 2021.
See, Coinbase had plans to release a product
that paid customers interest in exchange for lending.
But the SEC did not like this at all
and threatened to sue them into oblivion.
And sure, Coinbase execs took the
whole thing public on social media.
But the SEC did not back down,
and Coinbase ends up scrapping the project.
The SEC had successfully let the crypto world know that there
was a new sheriff in town, and this seems to have
set the tone for their interactions in the future.
Coinbase has recently increased token offerings, which gained
them even more attention from the SEC.
And now they've found themselves in the middle
of an SEC probe into whether it's been
offering unregistered securities on its platform.
Unsurprisingly, this caused Coinbase stock
to plummet by 21%.
Given that Coinbase is such a large exchange
listing over 150 tokens, having those tokens deemed
securities would be a huge overhaul to the crypto industry,
beyond just the company itself having
to register as an exchange with the SEC.
And while the Coinbase chief legal officer has said,
[Highlighted text on screen]
It's unclear as to how the situation will resolve at this point,
but a crypto exchange versus the US Government
isn't exactly a good outcome for the industry.
Exchange platforms don't want to offer tokens that
become securities because they then trigger investor protection rules,
which makes business more difficult and might
not be well received by their crypto consumer base.
I think regulations can be okay
as long as they don't slow down progress in this space.
So, what do you think?
Are cryptocurrencies a security?