Trade group argues U.S. SEC case unfairly labels crypto as securities

By Hannah Lang

Feb 22 (Reuters) – Cryptocurrency trade association Chamber of Digital Commerce is urging a federal court to dismiss a case brought by the U.S. securities regulator against ex-Coinbase employees accused of insider trading, arguing that the case unfairly labeled several crypto assets as securities.

The group said in an amicus brief filed Wednesday in a district court in Washington that if the court were to proceed with the case from the U.S. Securities and Exchange Commission (SEC), it could have wide-ranging consequences for the digital asset industry and harm crypto investors.

An amicus brief is a document filed in court by an organization or individual who is not named in the case, but has a strong interest in the matter. The Blockchain Association also filed an amicus brief in the case earlier this month.

"We consider this regulation by enforcement because it’s creating new legal precedent through an enforcement action, but it would be much better for the entire industry if we just had clear rules to the road," said Perianne Boring, the founder and chief executive officer of the Chamber of Digital Commerce, in an interview.

The SEC brought charges in July against Ishan Wahi, a former product manager at Coinbase, and his brother Nikhil Wahi, as well as their friend Sameer Ramani, accusing them of purchasing and selling at least 25 crypto assets for a profit based on insider knowledge, nine of which the agency said it had identified as securities.

Federal prosecutors also brought related criminal charges against the Wahi brothers and Ramani, charging the defendants with wire fraud in the first-ever insider trading case involving cryptocurrency. Ishan Wahi pled guilty to two counts of conspiracy to commit wire fraud earlier this month.

But the Chamber of Digital Commerce is arguing that the SEC's case is a backdoor attempt to label crypto tokens as securities, and that the regulator should have instead either promulgated a rule clarifying its expectations or waited for certainty from Congress.

"It’s in these types of situations where I think optimally, because you have an intra-governmental battle, you have Congress sort out the regulatory morass or at a minimum, have a typical ordinary notice and comment process," said Daniel Stabile, the co-chair of the digital assets and blockchain technology group at Winston & Strawn LLP, who is one of the attorneys representing the Chamber of Digital Commerce.

The crypto industry has previously criticized the SEC for bringing enforcement cases against digital asset companies, arguing that the regulator should instead engage in formal rulemaking specific to cryptocurrency. The SEC has maintained that pre-existing securities laws also apply to digital assets, and that many crypto tokens meet the definition of a security.

Were the court to rule in the SEC's favor, crypto exchanges that offer the nine tokens the SEC has labeled as securities could face state and federal regulatory actions as well as private litigation, the Chamber of Digital Commerce argued in its amicus brief. The move would also likely hurt the value of those tokens, which could harm retail investors, the group said.

(Reporting by Hannah Lang in Washington Editing by Nick Zieminski)