For the Defense - Vol. 8, Issue 3 - 54

Coinbase has the financial resources to challenge the SEC and
litigate the issues in the Complaint. The disposition of this case,
hopefully in time, will further clarify the law regarding exchange
traded coins and staking programs.
SEC v. Binance Holdings Ltd. (D.D.C.), Docket No.: 1:23-cv-01599
Binance is the world's largest cryptocurrency exchange.10
U.S. v. Wahi (S.D.N.Y.), Docket No.: 22-cr-392;
SEC v. Wahi (W.D.Wash.), Docket No.: 2:22-cv-01009
In July 2022, the DOJ charged a former Coinbase product manager,
his brother, and a third man with wire-fraud and conspiracy charges
in what prosecutors called the first " insider trading case " involving
cryptocurrency.15
On
June 5, 2023, the SEC sued Binance, its U.S.-based affiliated, BAM
Trading Services Inc. (which, together with Binance, operates the
cryptocurrency trading platform known as " Binance.US " ), and
their founder Changpeng Zhao, for various securities violations.
The charges include operating unregistered exchanges, brokerdealers,
and clearing agencies; misrepresenting training controls and
oversight on the Binance.US platform; and the unregistered offer
and sale of securities.11
The day after the SEC filed its Complaint, the SEC filed an
emergency action application seeking a temporary restraining order
(TRO) freezing assets, directing defendants to repatriate assets held
for the benefit of customers of the Binance. US cryptocurrency
trading platform, and seeking other emergency relief against Binance
Holdings Limited, BAM Trading Services Inc., BAM Management
US Holdings, Inc., and Zhao, to ensure that Binance.US customers'
assets are protected and remain in the United States through the
resolution of the SEC's pending litigation of this matter.12
On June
17, 2023, a federal judge approved an agreement between the
parties dismissing the TRO. The agreement allowed only Binance.
US employees to have access to client funds until the litigation is
resolved, and U.S. based customers to retain the ability to withdraw
funds through the SEC lawsuit.
Trends in Criminal Enforcement
As demonstrated in Coinbase and Binance, the SEC has made
matters so complex that the DOJ has indicated that instead of
indicting cases in connection with specific securities law violations,
it has avoided the uncertainty by charging matters involving
cryptocurrency as wire fraud. This strategy allows DOJ to prosecute
cryptocurrency matters in an easy and clean way that will almost
certainly secure a conviction.
DOJ Cryptocurrency Enforcement Framework
In October 2020, the DOJ's Cyber Digital Task Force published its
Cryptocurrency Enforcement Framework, which examines the illicit
uses of cryptocurrencies, the legal and regulatory tools available to
the government to confront those illicit uses, and the challenges
that the government faces in cryptocurrency enforcement.13
The DOJ
determined that " illicit uses of cryptocurrency typically fall into three
categories: (1) financial transactions associated with the commission
of crimes; (2) money laundering and shielding of legitimate activity
from tax, reporting, or other legal requirements; and (3) crimes, such
as theft, directly implicating the cryptocurrency marketplace itself. " 14
The former Coinbase employee, Ishan Wahi, was
alleged to have tipped his younger brother, Nikhil Wahi, to trade on
Coinbase insider information in a $1.5 million scheme.
This case did not proceed to a jury trial. The younger Wahi (the
tippee) pleaded guilty to the criminal charges in September 2022,
and in January 2023 was sentenced to ten months in prison. The
older Wahi (the ex-Coinbase employee) pleaded guilty to the
criminal charges in February 2023, and in May was sentenced to two
years in prison. The third individual is apparently still at large.
Two days after the Indictment, the SEC filed an enforcement
action against the Wahis and the third individual on charges
of insider trading. After the Wahis pleaded guilty, they filed a
Motion to Dismiss the SEC's complaint on multiple grounds, most
importantly, the cryptocurrencies at issue are not " securities " and
that the major questions doctrine precludes the SEC from departing
from the traditional definition of an " investment contract " and
deeming cryptocurrencies as " securities. " However, before a court
had a chance to rule on the Wahis' Motion to Dismiss, the Wahis
settled their case with the SEC on terms that generally were satisfied
by the resolution of their parallel criminal cases. They were not
required to pay a monetary penalty.
The FTX Cases:
USA v. Bankman-Fried (S.D.N.Y.), Docket No.: 22-cr-673;
SEC v. Bankman-Fried (S.D.N.Y.), Docket No.: 1:22-cv-10501
USA v. Ellison and Wang (S.D.N.Y.), Docket No.: 22-cr-673;
SEC v. Ellison and Wang (S.D.N.Y.), Docket No.: 22-cv-10794
The cryptocurrency industry was rocked in November 2022
following FTX's multibillion-dollar collapse when news broke about
the relationship between FTX and FTX's hedge fund, Alameda
Research. Unlike the foregoing matters, the FTX cases do not
necessarily hinge on the question of whether cryptocurrencies are
" securities. " This is because the FTX cases also involved the sale of
equity stakes in FTX itself. It is unclear, however, whether the fraud
charges are in connection with the purchase or sale of the equity
shares as opposed to the retail transactions on the FTX exchange.
Both the DOJ and SEC simultaneously filed charges against FTX cofounders
Sam Bankman-Fried and Gary Wang, and former Alameda
Research co-CEO Caroline Ellison. The SEC violations include fraud in
offer or sale of securities (violations of Section 17(a)(1) and (3) of the
Securities Act), and fraud in connection with the purchase or sale of
securities (violations of Section 10(b) of the Exchange Act and Rules
10b-5(a) and (c)).
Bankman-Fried was charged with eight crimes: conspiracy to
commit wire fraud on customers; wire fraud on customers; conspiracy
54 For The Defense l Vol. 8, Issue 3
http://www.Binance.US http://www.Binance.US
For the Defense - Vol. 8, Issue 3

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