Why People think SEC is Indecisive on Which Crypto Assets are Securities

[TL;DR]

- The SEC has been pushing for increased regulatory oversight on crypto products and platforms that may be selling or offering securities.
- The regulatory body has brought several enforcement actions related to crypto platforms and exchanges.
- However, the SEC is not yet categorical on which crypto assets are securities and which are commodities.
- The recent charge against a former manager at Coinbase, Ishan Wahi, has woken the specter of the debate, with many believing that SEC is not yet decisive on which crypto assets are securities.

Keywords: Crypto assets, securities, SEC, commodities, investment contracts


Since the inception of cryptocurrencies, the debate has been raging on how to fit these new digital assets into traditional categories. One crucial dimension of this debate is determining which of the newly emerging crypto assets are securities. There are strict laws that regulate securities. These laws require detailed disclosures to inform investors of potential risks, unlike commodities. In 2017, the former chair of the Securities and Exchange Commission, Jay Clayton, cautioned crypto exchanges that many of their products likely fall under securities and should therefore be registered under federal securities laws. A year later, Clayton stated in an interview that cryptos that serve as replacements for fiat currencies are commodities rather than securities. The recent SEC charges against a former manager at Coinbase, Inc., Ishan Wahi, have continued to attract comments from different quarters, with many believing that SEC is not yet decisive on which crypto assets are securities.


SEC charges against Ishan Wahi, Nikhil Wahi, Sameer Ramani

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On July 21, 2022, SEC claimed that Ishan Wahi, his brother Nikhil Wahi and his friend Sameer Ramani engaged in insider trading in a single-count complaint filed in the United States District Court for the Western District of Washington. The action against the defendants is based on allegations that Wahi provided material, nonpublic information about the content and timing of upcoming Coinbase "listing announcements" to his brother and Ramani. This act which allowed the duo to profit by buying the crypto assets before the announcements and afterward selling the assets post-listing to the tune of over $1 million in total, SEC alleged, violated the Securities Exchange Act. According to the SEC's complaint, blockchain addresses associated with Nikhil Wahi and Ramani traded in at least 25 crypto assets ahead of more than ten listing announcements on Coinbase. SEC asserted that 9 of the 25 crypto assets were securities.

However, the SEC complaint does not mention why the remaining 16 crypto assets did not qualify as securities. The SEC alleges that the nine crypto assets at the heart of the securities fraud charges were "investment contracts" under the securities laws because they were:
1. "Offered and sold to investors."
2. "They made an investment of money in a common enterprise."
3. They created "a reasonable expectation of profits to be derived from the efforts of others."


United States Attorney's Office for the Southern District of New York's (SDNY) Parallel Charge

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Contrary to the SEC's security fraud charge against Wahi, his brother, and Ramani, SDNY indicted the defendants of wire fraud. According to the SDNY indictment, Wahi's brother and friend separately executed trades involving at least 25 different crypto assets shortly before at least 14 listing announcements based on tips from Ishan Wahi of material nonpublic information about anticipated listing announcements, resulting in $1.5 million in illicit profits.

The four counts of wire fraud in SDNY's account include:
1. Wire fraud conspiracy against Wahi and his brother.
2. Separate wire fraud conspiracy against Wahi and his friend.
3. Substantive wire fraud against Wahi and his brother.
4. Substantive wire fraud against Wahi and his friend.






Why do people think the SEC is indecisive on which crypto assets are securities?

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The SEC announced on May 3, 2022, that it would add 20 new positions to the newly renamed Crypto Assets and Cyber Unit within the Division of Enforcement. The unit now has 50 positions dedicated to enforcing potential securities law violations involving crypto-asset offerings, crypto asset exchanges, crypto asset lending, staking products, DeFi platforms, non-fungible tokens (NFTs), and stablecoins. Since 2017, the Crypto Assets and Cyber Unit has brought more than 80 enforcement actions related to crypto asset offerings and platforms, resulting in more than $2 billion in monetary relief.

The SEC has been pushing for increased regulatory oversight of cryptocurrency products and platforms that may be selling or offering securities. However, terms such as "coin," "token," "currency," and "asset" are frequently used interchangeably to describe the thousands of products in the crypto world, making it difficult to categorize them based solely on terminology accurately.


The Howey Test

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The SEC considers whether a digital asset is an "investment contract" when determining whether it is a security. To be classified as an investment contract, an asset must meet the three criteria of the Howey Test, developed and named after the Supreme Court case SEC v. W.J. Howey Co., 328 U.S. 293 (1946). According to the Howey Test, there must be (1) an investment of money, (2) in a joint enterprise (3) a reasonable expectation of profits through the effort of others. However, it often proves daunting to SEC-registered investment advisers to apply the Howey test if they are urged to determine whether particular crypto assets are "securities."

The SEC's legal theory that certain crypto assets are "securities" is still pending in federal courts. The SEC is currently litigating a similar issue in a case against Ripple Labs over whether Ripple's sales of the digital asset XRP constituted unregistered securities offerings.

The Wahi case's lack of a securities fraud charge by SDNY may reflect the concerns about proving beyond a reasonable doubt that defendants dealt in a "security" subject to federal securities laws.


Conclusion

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SEC has taken steps to regulate the crypto industry to protect investors and maintain financial stability within the market. To effectively carry out its regulatory projects over crypto assets, stablecoins, and crypto platforms, it would have to be categorical on which crypto assets are securities. As it stands now, this is far from being the case. The SEC's legal theory on applying the Howey test on crypto assets is still being contested in federal courts.




Author: Gate.io Observer: M. Olatunji
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* This article represents only the views of the observers and does not constitute any investment suggestions.
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