Why the SEC going after a "crypto insider trading" case at Coinbase is almost strike four

At the beginning of the year, I had laid out a few of the worst possible things that could happen to crypto in 2022.

Some risks were likely, and some were low-probability events but would have disastrous impacts for an industry still on-ramping mainstream adopters.

The Securities and Exchange Commission (SEC) just shot a cannon of a warning shot this week.

If you've been reading this newsletter since it launched, you'll probably remember that record $100 million fine the SEC levied on crypto lender BlockFi earlier this year.

At the heart of it was the belief held by the SEC that BlockFi paying interest on crypto assets was a "securities contract." And, as such, had to be registered with the SEC. Not the end of the world, just something to register and win approval for. However, it's now almost July and BlockFi still doesn't have clearance to lend to new customers or take new "crypto deposits."

But the SEC has yet to weigh in on on the broader question of whether some crypto assets by themselves are actually securities. SEC Chair Gary Gensler has hinted pretty strongly he believes a lot of them, outside of Bitcoin and maybe Ethereum, definitely are.

That would obviously be bad for a number of reasons. One, Coinbase and other crypto exchanges would be in trouble for not registering with the SEC (that's why Coinbase shares fell 21% on Tuesday.) But it would also be a problem for any token issuers, as they would need to also register with the SEC and go through arduous disclosure processes that are in place to "protect" investors. There would also be a bunch of "know your customer" and anti-money laundering hoops to jump through that nobody in crypto is too keen on.

Basically, it'd be a real mess. But no one has really given it all that much thought recently seeing as the SEC hasn't really been all that combative since the BlockFi fine back in February.

That's why the first-ever crypto related insider trading charges brought against a former Coinbase employee are all the more surprising. I mean, the SEC didn't even participate in the DOJ's case against a former Open Sea employee accused of front-running NFT sales on the site just a couple months ago. Maybe they had already chosen something in this case thay they saw as easier for them to prove their point.

As Bloomberg reported this week, it also is just as strongly a shot across the bow at competing financial watchdog the Commodity Futures Trading Commission (CFTC) who has also tried to establish jurisdiction over crypto assets. The SEC could be trying to corner regulating altcoins beyond Bitcoin.

“If you’re trying to say that virtually every token, except Bitcoin, is a security, that raises an existential threat to Coinbase and the whole crypto economy,” said Aitan Goelman, a partner at Zuckerman Spaeder and previously a director of enforcement at the CFTC.

Maybe because this case alleges that an employee basically gave his buddies a list of cryptos soon to be listed on Coinbase in order for them to profit makes the SEC confident to get back into the regulatory swing of things. In taking one bad actor down it could potentially take down a whole industry.

Other than Coinbase shares tanking this week, there doesn't appear to be too many people spooked by the move. Ethereum continues chugging along, regardless. People are still focusing on planned upgrades.