As cryptocurrency continues to make a name for itself in social, financial, and economic industries, opportunists are finding new ways to reap illicit gains from novel assets. In a first-of-its-kind case in the crypto markets, the Department of Justice announced that it would be bringing charges against three men in what has been described as a "first-ever cryptocurrency insider trader tipping scheme."

The charges which were brought forward by the U.S. Attorney for the Southern District of New York name three individuals as having used their position and connections with a cryptocurrency trading platform to make illegitimate trades in order to reap substantial rewards.

The DOJ’s indictment names Ishan Wahi, a former product manager at the leading crypto exchange platform, Coinbase, as the head of the illicit trading scheme. His brother Nikhil Wahi and associate Sameer Ramani were also named in the indictment. All three men are charged with wire fraud conspiracy and wire fraud. According to officials, Ishan Wahi passed on insider information about an asset’s future price jump to his brother Nikhil and associate Ramani. The profits received from the trade included $7,000 from trading the asset Tribe (TRIBE), $13,000 from Alchemix (ALCX), Gala (GALA), Ethereum Name Service (ENS) and Powerledger (POWR), and an additional $900,000 from XYO.

In a separate yet related case, the men have also been charged by the Securities and Exchange Commission (SEC) with insider trading because of the deals they made using knowledge that was not yet available to the public. However, this charge of insider trading has been met with a bit of resistance and confusion from related organizations including the trading platform, Coinbase, itself.

The decentralized nature of cryptocurrency has made it difficult for the SEC or really any global governing body to regulate. This has caused a large lack of oversight within this specific asset class. The charge of insider trading brought forward by the SEC could be the first glimpse of oversight that would set the framework for how cryptocurrencies are regulated, something this asset class has been able to largely avoid.

There has been a lengthy debate about how regulation should take place and whether Crypto even fits the criteria to be classified as a security in the first place. SEC Chair Gary Gensler shared with CNBC in August 2021 that the SEC considers a number of cryptocurrencies to be securities under the Howey Test. Gensler explained, "If somebody is raising money selling a token and the buyer is anticipating profits based on the efforts of that group to sponsor the seller, that fits into something that is a security."

This stance takes the opposite approach of what former SEC Chair Jay Clayton shared in June of 2019. In an interview with CNBC, Clayton explained that popular crypto Bitcoin was not a security. “Cryptocurrencies are replacements for sovereign currencies…[they] replace the yen, the dollar, the euro with bitcoin. That type of currency is not a security,” he said.

In this recent indictment against the three men, the SEC director of the Enforcement Division, Gurbir S. Grewal, shared “We are not concerned with labels, but rather the economic realities of an offering." He adds, ​​"In this case, those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase. Rest assured, we’ll continue to ensure a level playing field for investors, regardless of the label placed on the securities involved."

The charges of insider trading were also met with pushback by the CEO of Coinbase and a Commissioner from the Commodity Futures Trading Commission (CFTC).

Commissioner Caroline D. Pham of CFTC expressed in a statement, “The case SEC v. Wahi is a striking example of 'regulation by enforcement.' 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.” Pham adds, “The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together. Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input—through notice-and-comment rulemaking pursuant to the Administrative Procedure Act. Regulatory clarity comes from being out in the open, not in the dark.”

Coinbase CEO Brian Armstrong also shared through a blog post his pushback against the SEC moving forward with insider trading charges. Though he supported the indictment by the DOJ, he explained “No assets listed on our platform are securities, and the SEC charges are an unfortunate distraction from today’s appropriate law enforcement action.”

Coinbase has been adamant in its stance that regulation surrounding digital assets needs to be rooted in consistency. A statement on Coinbase’s website explains, "The SEC’s charges put a spotlight on an important problem: the US doesn’t have a clear or workable regulatory framework for digital asset securities. And instead of crafting tailored rules in an inclusive and transparent way, the SEC is relying on these types of one-off enforcement actions to try to bring all digital assets into its jurisdiction, even those assets that are not securities."