The U.S. securities regulator filed a lawsuit against former Coinbase (COIN.O) employees accusing them of insider trading. According to the cryptocurrency industry group Chamber of Digital Commerce, the case wrongfully classified a number of crypto assets as securities.
In an amicus brief submitted on Wednesday to a district court in Washington, the group claimed that if the case brought by the U.S. Securities and Exchange Commission (SEC) went forward, it could have negative effects on cryptocurrency investors and the digital asset industry as a whole.
An amicus brief is a document filed in court by an organization or individual who is not named in the case but has a strong interest in the matter. The Blockchain Association also filed an amicus brief in the case earlier this month.
“We consider this regulation by enforcement because it’s creating new legal precedent through an enforcement action, but it would be much better for the entire industry if we just had clear rules to the road,” said Perianne Boring, the founder and chief executive officer of the Chamber of Digital Commerce, in an interview.
Ishan Wahi, a former product manager at Coinbase, his brother Nikhil Wahi, and their friend Sameer Ramani were charged by the SEC in July with securities fraud for allegedly buying and selling at least 25 cryptocurrencies for a profit using insider information, nine of which the agency claimed to be securities.
In the first-ever insider trading case involving cryptocurrency, federal prosecutors also filed criminal charges of wire fraud against the Wahi brothers and Ramani. Ishan Wahi entered a plea guilty earlier this month to two counts of conspiring to commit wire fraud.
The Chamber of Digital Commerce, however, contends that the SEC’s case is an underhanded attempt to classify cryptocurrency tokens as securities and that the regulator should have either issued a rule outlining its expectations or waited for confirmation from Congress.
One of the lawyers for the Chamber of Digital Commerce is Daniel Stabile, co-chair of the firm Winston & Strawn LLP’s digital assets and blockchain technology group. “I think optimally because you have an intra-governmental battle, you have Congress sort out the regulatory morass or, at a minimum, have a typical ordinary notice and comment process,” he said.
Regarding the amicus curiae brief, the SEC declined to comment.
The SEC has previously drawn criticism from the crypto industry for bringing enforcement cases against digital asset companies, arguing that the regulator should instead engage in formal rulemaking specific to cryptocurrency. The SEC has maintained that pre-existing securities laws also apply to digital assets and that many crypto tokens meet the definition of a security.
The Chamber of Digital Commerce argued in its amicus brief that, should the court rule in the SEC’s favor, crypto exchanges that provide the nine tokens the SEC has classified as securities could be subject to state and federal regulatory actions as well as private litigation.
The group claimed that the action would likely lower the value of those tokens, which could be detrimental to retail investors.