Ex-Coinbase Manager files to dismiss SEC claims

Former Coinbase Product Manager Ishan Wahi has urged the court to dismiss insider trading charges against him — claiming that the U.S. Securities Exchange Commission (SEC) lacks the authority to classify tokens as securities.

The SEC arrested Ishan Wahi and his brother Nikhil Wahi in July 2022 for insider trading charges —alleging that the brothers made roughly $1.5 million in profit by leveraging insider information to trade securities on the Coinbase platform.

So far, Nikhil has pleaded guilty to the charges and is facing a 10 months jail term. Ishan has pleaded not guilty, claiming that the SEC was wrong in its classifications of securities.

Tokens not investment contracts

Lawyers representing Ishan filed a motion on Feb. 6 to argue that the assets involved in the case are not investment contracts or securities.

Based on the SEC’s Howey Test, a token is considered an investment contract if a person is “led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts of the promoter or someone other than themselves.”

In Ishan’s case, the lawyers argued that the token holders are not part of any “common enterprise” and do not depend on the efforts of the developers to increase the value of the tokens but on market forces.

Furthermore, since the tokens were traded on a secondary market, there is no contractual agreement between the developers and token holders.

“[…]And with zero contractual relationships, there cannot be an investment contract.”

Consequently, lawyers urged the U.S. District Court to dismiss the charges against Ishan on grounds that the SEC’s classification of the tokens as securities is wrong.

SEC authorization to classify securities

Ishan’s lawyers said that the SEC lacked congregational authorization to classify tokens as securities.

They claimed the SEC’s misinterpretation of investment contracts and lack of regulatory guidelines for the crypto industry worth over $1 trillion makes it unfit to modify standards to classify digital assets as securities.

“If the SEC really believes digital assets are securities, it should engage in a rulemaking or other public proceeding explication that view and providing guidance to regulated parties on its implications.”