Cryptogram-05AUG2022

The Crypto Insider Trading Scandal

August 05, 2022

5 August 2022

In this issue

Hello, On May 16, 2022, Seattle-based Indian-origin Coinbase employee Ishan Wahi was attempting to board a flight to India with a one-way ticket when US law-enforcement officers stopped him and refused to let him leave the country. It is perhaps at that moment that Ishan realized that there was no escaping the law, and that the consequences of his alleged lies and insider trading had caught up with him. About two months later, on July 20, when Ishan and his brother Nikhil were arrested for wire fraud and other related charges, they made history: they were the first people to ever be arrested for cryptocurrency “insider trading.”

On July 21, the office of the US Attorney for the Southern District of New York filed charges against Ishan, Nikhil, and their friend Sameer Ramani for investing in coins based on insider information. Just last month, the same office also indicted a former employee of OpenSea for indulging in NFT insider trading.This week on Cryptogram, we are going to be laying out the anatomy of this insider trading scandal, explaining why action against them is a good thing for the crypto ecosystem, but also why a part of the legal reasoning behind these arrests is problematic. 

The newsletter is put together by Giottus Crypto Platform and The News Minute’s Brand Studio. You can read all the previous issues of Cryptogram here.

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THE BIG STORY

 The good, bad, and the ugly of the Coinbase insider trading scandal 

Let’s start with the ugly. Our characters: Coinbase, Ishan Wahi, Nikhil Wahi, Sameer Ramani, a Twitter account and US law enforcement.Coinbase is one of the largest cryptocurrency exchanges in the world. It regularly adds new crypto assets to those that could be traded through its exchange, and the market value of those crypto assets, typically, significantly increases after Coinbase announces that it would be listing them.Ishan Wahi worked at Coinbase as a product manager in the asset listing team. Since at least August 2021 and continuing through May 2022, Ishan was a member of a private Coinbase messaging channel reserved for a small number of Coinbase employees with direct involvement in the Coinbase asset listing process. The private channel was used to discuss, among other things, “exact announcement/launch dates + timelines” that Coinbase did not wish to share with all of its employees. Accordingly, Coinbase kept such information strictly confidential and prohibited its employees from sharing that information with others, including by providing a “tip” to any person who might trade based on that information.You know how we keep talking about how transparency is everything, and that’s what makes blockchain great? This is a good illustration of that point. On April 12, Cobie, a Twitter account that is well known in the crypto community, tweeted that an Ethereum wallet “bought hundreds of thousands of dollars of tokens exclusively featured in the Coinbase Asset Listing post about 24 hours before it was published.” The US government says that this trading was done by Sameer Ramani.

So, what happened exactly?The DOJ indictment and SEC complaint allege that ahead of multiple token listing announcements in 2021 and 2022, Ishan used phone calls and text messages to tip off Nikhil and Sameer about the upcoming listings. For example, on August 30, 2021, Ishan learned that Coinbase would be listing the XYO token. In the days thereafter, and prior to the Coinbase’s public announcement, blockchain addresses associated with Ramani were allegedly used to purchase XYO tokens valued at $600,000. Following the public announcement by Coinbase that XYO tokens would be listed, those coins appreciated to approximately $1.5 million, representing a profit of approximately $900,000. The DOJ indictment alleges the defendants generated unrealized gains of at least approximately $1.5 million.Ishan and Nikhil were arrested on July 21, while Ramani remains at large and is believed to be in India. All three have been charged with wire fraud conspiracy and wire fraud, each of which carries a maximum sentence of 20 years.

If you are a crypto enthusiast, this might want you to duck for cover in embarrassment. But this is a GOOD thing.Crypto has become a legitimate asset class with hundreds of millions of investors globally. Such cases only highlight the importance of government regulations and action in ensuring that investors are not losing money to fraud. For the ecosystem to retain the trust, wrong actors need to be weeded out. It is essential to ensure safeguarding the interest of investors through proper articulation of corporate governance in a manner that ensures transparency and accountability from all crypto companies. So, these indictments should be celebrated by those in the ecosystem.And like we mentioned, this case is a great illustration of why blockchains are awesome. Transparency of blockchain transactions is an important factor in apprehending criminals. In this case, US authorities were able to trace the activities of Ishan, Nikhil and Ramani through their publicly viewable wallet activities, which was brought to attention by a Twitter account. Such public scrutiny followed by a government action is possible only because blockchain is essentially a public ledger – unlike bank networks which are private. This only proves that daily transactions, when on the blockchain, can have higher levels of fraud detection compared to what only a government body can do.But here’s the slightly BAD thing about this whole scandal: the SEC’s pronouncement in the complaint that a wide variety of the tokens involved were securities.The SEC’s allegation that Ishan, Nikhil and Ramani violated the Securities Exchange Act of 1934 requires that some of the tokens they traded were “securities.” Coinbase has strongly challenged the notion that any of the crypto assets on its platform are securities. Securities are fungible and tradable financial instruments used to raise capital in public and private markets. A stock is a security.A commodity is a material thing which has intrinsic value that can be bought and sold via the cash market. Oil is a commodity. Investors can also speculate on the prices of commodities via futures contracts, or derivatives tied to the price of a commodity in the future. Bitcoin is being treated as a commodity with calls for Ethereum to get similar treatment.Commodity markets are generally regulated less stringently. Securities on the other hand are subject to rules on price transparency, greater reporting demands, as well as market abuse oversight. Overseeing a security tends to be much more expensive since it’s more work to make sure a product is in compliance with regulation. This could prove to be extremely hard for the crypto ecosystem.But till policy evolves to regulate crypto in a more meaningful manner, perhaps this is the only mechanism the law has to crackdown on bad actors. 

Crypto regulation in IndiaThe story here in India, however, is remarkably different. Sure, the government has a significant role to play in safeguarding the interest of crypto investors, but there is a need for the framework to develop further in a balanced manner. The government needs to keep in view the Indian context, while enabling best international practices. Here are a couple of things that the Indian government must consider in the interest of consumer protection. One, crypto based businesses that hold assets belonging to retail investors should be made accountable for the risks that they undertake with those assets. (Celsius comes to mind.) There should be proper deliberation on the need for crypto companies to take risk cover/insurance for depositors. Many questions need answering: How are funds being stored? Who is accessing them and when? How to compensate when a default happens?Two, new crypto laws should also provide a regime for enforcement of standards for accounting, audit and non-financial disclosure. These standards should be effectively monitored by the government. Proper and timely disclosures are central to safeguarding crypto investors’ interests, and companies must be compelled to disclose material information on a continuous, timely and equitable basis.

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  THE TOP FIVE 

Stories from this week you cannot miss

  EXPLAIN, PLEASE 

Demystifying the world of cryptocurrency

This week, we explain CRYPTO WALLETSWe keep our cash and cards in our physical wallet. But crypto wallets technically don’t store the cryptocurrencies. Our holdings are on the blockchain always. However, they can only be accessed using a private key, and crypto wallets hold those private keys. If you don’t have your private keys, then you lose access to your cryptocurrencies. Crypto wallets can be hardware wallets, like USB drives or hard drives, or online wallets like Giottus Wallet. Technically speaking, if you write down your keys on a piece of paper, then that paper is also a wallet. Today, online wallets in crypto exchanges also allow you manage your cryptocurrencies and send or receive them. That’s it for this issue. But a special request: write to us with ideas on what topics you would like us to explain or give you inputs on in forthcoming issues. We are very eager to please you with our deep knowledge of the crypto ecosystem. You can write to us at [email protected].

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