• Christopher H. Loo, MD-PhD

Coinbase is Not the Problem, The Problem is an Outdated Financial Regulatory System

by: Christopher H. Loo, MD-PhD


 

Photo courtesy of Fortune.com


 

Tl;dr: The recent charges against former Coinbase employee Ishan Wahi for insider trading by the Department of Justice are the most recent negative headlines against Coinbase. The case highlights a completely outdated financial system where 21st century digital assets are evaluated against a 1930’s securities framework. And highlights the need for a clear and proper financial regulatory framework going forwards.


Note: My views. Not financial advice.

If you’ve been paying attention to the news since May 2022 when the crypto bear market winter started, Coinbase has been highlighted negatively in the news numerous times.

  1. Coinbase downsizing, and letting go 18% of its workforce (though it is not alone).

  2. Coinbase rescinding job offers before new hires even started.

  3. Misunderstanding among retail investors around Coinbase’s quarterly 10-Q May 2022 filing with the recently added SEC requirement, SAB 121, regarding the safeguarding of cryptocurrency assets.

  4. Charging of Ishan Wahi, a former product manager at Coinbase for insider trading, of which the remainder of this article will be devoted to.

  5. Falling out of the world’s top 10 global cryptocurrency exchanges.


Background: Essentially, the DOJ-SEC charged that Ishan collaborated with his brother (Nikhil Wahi), and their friend (Sameeer Ramani), and used Ishan’s insider status as a Coinbase employee to inform the parties of when particular tokens would be listed.


The defendants are alleged to have made illegal trades in at least 25 different crypto assets and realized ill-gotten gains totaling approximately $1.5 million from the period of June 2021 through May 2022.


At issue are 9 tokens, which the SEC is claiming to be securities. The tokens listed were Flexa’s AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX and KROM.


As a result of these charges, Coinbase is being probed by the SEC for listing securities instead of tokens.


At the heart of the issue lie a number of questions:

  1. How should crypto assets should be evaluated and regulated as securities or tokens. The SEC currently uses the “Howey” test to determine whether a cryptocurrency is a token or security. It is important to note that The Howey test is a securities law framework developed in the 1930’s, and that the SEC is using this antiquated framework to evaluate digital assets developed in the 21st century.

  2. Whether there will be enforcement actions against crypto issuers behind the assets identified in Thursday’s action.

  3. Whether it will bring charges against exchanges listing these assets, and whether Coinbase would be penalized for listing the assets.

The case highlights the current limitations of our digital regulatory landscape where 21st century digital assets are evaluated against 1930’s securities laws.


In previous blog posts, I wrote about the problems that arise when bad actors (May 2022) enter the highly nascent cryptocurrency space, and the need for responsible financial innovation and the role that proper, fair, and clear regulatory frameworks play in this space, as outlined in recent legislation introduced by Senators Lummis (R-WY)and Gillibrand (D-NY) in the Responsible Financial Innovation Act (June 2022).


The recent action by the SEC demonstrates an example of “regulation by enforcement”, stated CFTC Commissioner Carolyn Pham, as opposed to putting clear regulatory guidelines in place so that the actors know how to operate and innovate in this highly nascent space.


Zooming out, a lack of clarity is also causing the United States to lose its competitive edge that it worked so hard to attain during the early 2000’s.


Top crypto companies such as FTX are stationed in the Bahamas, and a number of companies including Ripple are considering leaving the United States. Companies including Binance and FTX are acquiring and hiring during the current bear market crypto winter, while Coinbase recently fell out of the world’s top 10 global crypto exchanges.


Additionally, there is a massive brain drain from traditional industries (Wall Street) and moving into crypto. As a result, the smartest and brightest are flocking to crypto, and the United States does not yet have the proper legal or regulatory infrastructure to capitalize on this intellectual minefield, losing out to Singapore, Europe, and other countries which are crypto friendly and have their act together.


The United States was able to capitalize on the Internet boom with the top venture capital funding coming from Silicon Valley and home to the world’s most valuable companies (Meta, Google, Apple, Tesla), and it would be in the country’s best interest to do the same with the blockchain revolution.


Coinbase has reiterated that none of the cryptocurrencies it lists are securities, that is has a rigorous process for which digital assets are evaluated and listed.


Coinbase filed a petition with asking for the SEC to start a rulemaking process to detail how it would apply federal securities laws to crypto assets.


“Securities law is thus not well-suited to govern digital assets. Attempted application of such ill-fitting laws to crypto creates a number of problems,” in a recent blog post published by Coinbase stated.


 

About: Dr. Christopher Loo is a physician who became financially free at the age of 29, and retired early at the age of 38, as a result of making strategic investments after the 2008 financial crisis. A graduate of the MD-PhD program offered jointly through the Baylor College of Medicine and Department of Bioengineering at Rice University, he is the author of “How I Quit My Lucrative Career and Achieved Financial Freedom Using Real Estate”, and is the host of the Financial Freedom for Physicians Podcast. He is a regular contributor to KevinMD and has spoken about the importance of financial literacy for Passive Income MD, the White Coat Investor, Board Vitals, SEAK Non-Clinical Careers, SoMe Docs, Doximity, Medpage Today, FinCon, and other high-profile financial brands geared towards high-income professionals. He is passionate about the role that crypto, fintech, and innovation will play in enabling financial freedom, economic inclusion, access and opportunity for the entire world in the upcoming decades.

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