Coinbase’s Insider Trading Verdict Could be a Threat to the New Ripple vs SEC Case in 2024

Key Insights:

• Ishan Wahi, Sameer Ramani, and Nikhil Wahi were the accused.
• Ishan was working at Coinbase, and Sameer and Nikhil were his associates.
• The court found Ramani guilty of trading securities.
• Gave a different interpretation of the Howey Test.
• Both courts exist on the same hierarchy, so their decisions might clash.

In the world's first insider trading case involving digital assets, an ex-Coinbase employee and his two associates have been found guilty. The judge who gave the verdict ruled that both of them would be charged as per the rule on insider trading of securities.

The judgment seems to go against the verdict of the Ripple vs SEC case where XRP sold by Ripple Labs to its retail customers was ruled as "not security".

Coinbase Insider Trading Case and its Judgement

The US Dept of Justice and the SEC had sued an ex-Coinbase employee for illegal profiteering using insider data. The charges accused them of carrying transactions on TRIBE, ALCX, XYO, GALA, ENS, POWR and other cryptocurrencies.

The recent judgement on March 1, 2024 found them guilty on these charges.

It could be said that the judgement might have nominally been in the favour of Coinbase, but it was more so for the SEC which earlier failed to secure a judgement in its favour against Ripple.

The District Court, W.D. of Washington ruled that Sameer Ramani was trading in the secondary markets. But since most of the securities that he was trading, had some kind of representation that investing in them would profit the holders, constitute to the fact that they were indeed securities.

The court had found that the actions of Ramani should be considered as security transfers because:

1. Since Ramani paid with his own money, the crypto were investments, regardless of their investment horizon.
2. Also, the court noted that the proceeds of the sales token would go to a single entity and that the failure of that entity could wipe the token value, it could be considered an enterprise,
3. Promotional materials that were used by the crypto issuers were taken as expectations of profit by the court.

Judgment Might be Against the Howey Test

The Howey Test lists four essential criteria within the USA, all of which must be fulfilled to categorize a financial instrument as a security. The test was prescribed by the Supreme Court of the USA and was named after the famous case of SEC vs W.J. Howey.

The four basic criteria of the Howey Test that must be fulfilled are:

• The financial asset must be an investment of money.
• The investment should be in a common enterprise.
• The investment should be with the expectations of profits.
• The profits must be derived from the efforts of the others.

Except third point, cryptocurrencies fulfill all other criteria. The twist around the second point is that in most official whitepapers, and launch documents, projects rarely mention that the cryptocurrencies will give profits to its holders. Rather, the cryptocurrencies are distributed for the motive of distributing control in a decentralized way.

However, the judge in the case of Sameer Ramani observed that since most of the projects had been making indicating towards the profitability of their tokens, all of the traded tokens qualify as securities.

Will it Overturn The Verdict of the Ripple vs SEC Case?

Earlier, in a landmark case fought between Ripple and the SEC, the US District Court of SD New York ruled that the retail crypto sale of XRP was not from the motive of profit and hence could not be classified as a security.

Now, that both the courts are heading in opposite directions, it could create immense confusion for the average user.

Though both cases could be appealed in higher courts, yet, for now, the situation has become confusing once again. There is again doubt in the mind of everyone as to what could be security and what not.

Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.