Fintech

Coinbase case could turn crypto tokens into securities

A crypto insider trading case could have implications far beyond the individuals charged, as the SEC seeks another avenue to have digital assets classified as securities.

The Coinbase app and others on a smartphone screen

The SEC is arguing that nine crypto tokens are securities under the Howey Test.

Photo: Silas Stein/picture alliance via Getty Images

For years, the crypto industry has been in a state of confusion about which tokens are in fact securities and which are not. A case filed by the SEC alleging insider trading by a former Coinbase employee and two accomplices could provide some clarity — but it also threatens to roil the industry and Washington as the march to regulate digital assets continues.

In the complaint, the SEC argues that nine of the 25 tokens that the three individuals traded in are securities under the Howey Test, a longstanding judicial standard that would mean they should be regulated by the SEC.

SEC Chair Gary Gensler has often said that he believes that many tokens that are now trading are securities, while bitcoin may be a commodity. It has also brought enforcement actions against certain tokens that it considers securities that have violated certain laws.

The insider trading complaint makes a direct case that nine tokens are securities: AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX and KROM. If a judge agrees, that would create a precedent to bring those nine tokens under SEC regulation, and would possibly apply to similar tokens.

Aside from the ongoing Ripple case, which was filed under a prior SEC chief, it’s the biggest move yet by Gensler’s SEC to regulate crypto through an enforcement action. The action also goes after much smaller tokens whose backers may not have the ability to take on a big legal battle against the SEC like Ripple.

Coinbase declined to comment but updated a blog post on its token-listing process, stating that it provided information from its internal investigation to the Justice Department. It also resisted the notion that any of the tokens trading on Coinbase are securities.

“We understand that the SEC has separately filed securities fraud charges related to this wrongdoing today,” Coinbase wrote. “The DOJ did not charge securities fraud. No assets listed on our platform are securities, and the SEC charges are an unfortunate distraction from today’s appropriate law enforcement action.”

The case also brought to the forefront a behind-the-scenes struggle between federal agencies seeking to regulate crypto.

CFTC Commissioner Caroline Pham called the SEC’s Coinbase case “regulation by enforcement” Thursday in a statement shared on Twitter. She appeared to take issue with the SEC seeking to have a judge deem these nine tokens securities. In the process, she shed light on her thinking about which tokens the CFTC might categorize as commodities under its oversight.

“The SEC complaint alleges that dozens of digital assets, including those that could be described as utility tokens and/or certain tokens relating to decentralized autonomous organizations (DAOs), are securities,” she wrote. She added, “Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input.”

Whether she and her fellow commissioners believe that all utility tokens and other tokens run by DAOs are not securities and should be regulated by the CFTC is not clear, but she noted that there are still “open questions” about utility tokens and DAO-related tokens.

“There is a large inside-government, internal struggle between the agencies” because of the “malleability of digital assets,” Michael Fasanello, chief compliance officer at LVL, told Protocol. Those players include the CFTC, SEC, FinCEN, IRS, OCC and FDIC. Fasanello believes there shouldn’t be one agency in charge of crypto but a coordinating body like the Office of the Director of National Intelligence, which was set up to coordinate intelligence after the failures of 9/11.

The stakes are high: While the Lummis-Gillibrand bill winds its way through Congress and the Biden administration orders additional studies of crypto, the case could determine which tokens are securities and which aren’t.

That matters for not just those nine tokens but also the many others that have similar characteristics and freely trade on Coinbase and other exchanges.

If those nine are deemed securities, Coinbase and others could have to remove them and similar tokens from their exchanges.

Coinbase published a post on Thursday calling on the SEC to initiate rulemaking on digital assets, including clarity on which tokens are securities, arguing that current securities laws don’t work for digital assets.

Ultimately, the case itself is a push for Congress to act. Since a court case will make precedent, it sends a message to lawmakers to take action. That’s because there’s only so much agencies can do on their own.

“Part and parcel to succeeding with these charges, and with this prosecution, is of course, defining how these securities meet the Howey Test,” Fasanello said. “But the other side of doing that being as specific as they were with it, is a way of signaling to Congress, ‘Hey, this is how serious we feel about these issues. We really want you to put this into law.’”

Entertainment

Google TV will gain fitness tracker support, wireless audio features

A closer integration with fitness trackers is part of the company’s goal to make TVs a key pillar of the Android ecosystem.

Making TVs more capable comes with increasing hardware and software requirements, leading Google to advise its partners to build more-capable devices.

Photo: Google

Google wants TV viewers to get off the couch: The company is working on plans to closely integrate its Android TV platform with fitness trackers, which will allow developers to build interactive workout services for the living room.

Google representatives shared those plans at a closed-door partner event last month, where they painted them as part of the company’s “Better Together” efforts to build an ecosystem of closely integrated Android devices. As part of those efforts, Google is also looking to improve the way Android TV and Google TV devices work with third-party audio hardware. (Google launched Android TV as an Android-based smart TV platform in 2014; in 2020, it introduced Google TV as a more content-centric smart TV experience based on Android TV.)

Keep Reading Show less
Janko Roettgers

Janko Roettgers (@jank0) is a senior reporter at Protocol, reporting on the shifting power dynamics between tech, media, and entertainment, including the impact of new technologies. Previously, Janko was Variety's first-ever technology writer in San Francisco, where he covered big tech and emerging technologies. He has reported for Gigaom, Frankfurter Rundschau, Berliner Zeitung, and ORF, among others. He has written three books on consumer cord-cutting and online music and co-edited an anthology on internet subcultures. He lives with his family in Oakland.

Sponsored Content

How Global ecommerce benefits American workers and the U.S. economy

New research shows Alibaba’s ecommerce platforms positively impact U.S. employment.

The U.S. business community and Chinese consumers are a powerful combination when it comes to American job creation. In addition to more jobs, the economic connection also delivers enhanced wages and a growing GDP contribution on U.S. soil, according to a recent study produced by NDP Analytics.

Alibaba — a leading global ecommerce company — is a particularly powerful engine in helping American businesses of every size sell goods to more than 1 billion consumers on its digital marketplaces in China. In 2020, U.S. companies completed more than $54 billion of sales to consumers in China through Alibaba’s online platforms.

Keep Reading Show less
James Daly
James Daly has a deep knowledge of creating brand voice identity, including understanding various audiences and targeting messaging accordingly. He enjoys commissioning, editing, writing, and business development, particularly in launching new ventures and building passionate audiences. Daly has led teams large and small to multiple awards and quantifiable success through a strategy built on teamwork, passion, fact-checking, intelligence, analytics, and audience growth while meeting budget goals and production deadlines in fast-paced environments. Daly is the Editorial Director of 2030 Media and a contributor at Wired.
Fintech

What the fate of 9 small tokens means for the crypto industry

The SEC says nine tokens in the Coinbase insider trading case are securities, but they are similar to many other tokens that are already trading on exchanges.

While a number of pieces of crypto legislation have been introduced in Congress, the SEC’s moves in court could become precedent until any legislation is passed or broader executive actions are made.

Illustration: Christopher T. Fong/Protocol

When the SEC accused a former Coinbase employee of insider trading last month, it specifically named nine cryptocurrencies as securities, potentially opening the door to regulation for the rest of the industry.

If a judge agrees with the SEC’s argument, many other similar tokens could be deemed securities — and the companies that trade them could be forced to be regulated as securities exchanges. When Ripple was sued by the SEC in late 2020, for example, Coinbase chose to suspend trading the token rather than risk drawing scrutiny from federal regulators. In this case, however, Coinbase says the nine tokens – seven of which trade on Coinbase — aren’t securities.

Keep Reading Show less
Tomio Geron

Tomio Geron ( @tomiogeron) is a San Francisco-based reporter covering fintech. He was previously a reporter and editor at The Wall Street Journal, covering venture capital and startups. Before that, he worked as a staff writer at Forbes, covering social media and venture capital, and also edited the Midas List of top tech investors. He has also worked at newspapers covering crime, courts, health and other topics. He can be reached at tgeron@protocol.com or tgeron@protonmail.com.

Enterprise

Werner Vogels: Enterprises are more daring than you might think

The longtime chief technology officer talked with Protocol about the AWS customers that first flocked to serverless, how AI and ML are making life easier for developers and his “primitives, not frameworks” stance.

"We knew that if cloud would really be effective, development would change radically."

Photo: Amazon

When AWS unveiled Lambda in 2014, Werner Vogels thought the serverless compute service would be the domain of young, more tech-savvy businesses.

But it was enterprises that flocked to serverless first, Amazon’s longtime chief technology officer told Protocol in an interview last week.

Keep Reading Show less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Climate

Dark money is trying to kill the Inflation Reduction Act from the left

A new campaign is using social media to target voters in progressive districts to ask their representatives to vote against the Inflation Reduction Act. But it appears to be linked to GOP operatives.

United for Clean Power's campaign is a symptom of how quickly and easily social media allows interest groups to reach a targeted audience.

Photo: Anna Moneymaker/Getty Images

The social media feeds of progressive voters have been bombarded by a series of ads this past week telling them to urge their Democratic representatives to vote against the Inflation Reduction Act.

The ads aren’t from the Sunrise Movement or other progressive climate stalwarts, though. Instead, they’re being pushed by United for Clean Power, a murky dark money operation that appears to have connections with Republican operatives.

Keep Reading Show less
Lisa Martine Jenkins

Lisa Martine Jenkins is a senior reporter at Protocol covering climate. Lisa previously wrote for Morning Consult, Chemical Watch and the Associated Press. Lisa is currently based in Brooklyn, and is originally from the Bay Area. Find her on Twitter ( @l_m_j_) or reach out via email (ljenkins@protocol.com).

Latest Stories
Bulletins