Crypto communication: insider trades and regulatory crusades

The former product manager of cryptocurrency exchange platform Coinbase has been sentenced after being found guilty of insider trading. Having previously pled guilty to conspiracy to commit wire fraud in February 2023, Ishan Wahi will now face two years in prison.

Ishan Wahi’s case is a both a familiar tale, and a landmark case. On the one hand, this is an insider trading case like any other; over a period of 10 months, Wahi provided confidential information regarding Coinbase’s planned token listings to his brother and another individual. The two men then traded off of the confidential information, making over $1.5 million in the process.

On the other hand, this case is notable insofar as it is the first time in which the U.S. Department of Justice (DOJ) has sentenced an individual for insider trading related to digital assets.

The judgment firmly establishes the DOJ’s commitment to tackling fraudulent activity for crypto, while the Securities and Exchange Commission (SEC) continue to vie for digital assets to be considered as securities.

The sentencing comes in the same week that the New York State Attorney General published landmark cryptocurrency legislation, and poses interesting questions for the future of monitoring and surveillance of communications for crypto.

Regulatory perimeters for crypto

Having been sentenced to only two years, instead of 40, U.S. Attorney Damian Williams said:

“Today’s sentence should send a strong signal to all participants in the cryptocurrency markets that the laws decidedly do apply to them. The Southern District of New York will hold those who engage in insider trading to full account, regardless of whether their illegal conduct occurs in the equity markets or in the market for crypto assets.”

While the DOJ’s message is clear, there is ongoing debate between U.S. regulators around the perimeter for digital assets, which has thus far prevented the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC) from adopting clear definitions and taking definitive action. In part, this is owing to the definition of crypto as a commodity or a security, a question that neither party seem able to agree on (except for Bitcoin, which is considered as a commodity by both).

There is some relief then in knowing that, while the CFTC and SEC disagree, resolution can be sought from the DOJ. This is because, unlike the SEC and CFTC, DOJ prosecutors are able to charge individuals with fraud in cases where they use deception for financial gain – regardless of what asset or tool was used in that deception.

While the case provides a degree of relief, it does nothing to clarify the regulatory permissions surrounding crypto. Meanwhile, U.S. crypto exchanges – including Coinbase – have threatened to leave the U.S. because of their overly-stringent approach to crypto. This comes in the same week that the New York State Attorney General published legislation to tighten regulations on the cryptocurrency industry.

Supervision of social media and other communication

It is clear that regulation for cryptocurrency exchanges is fast-evolving, and will soon face clarification.

What is particularly interesting in this case, however, is the spotlight it places on the modernized landscape with which regulators must now contend – one in which social media accounts appear to be conducting market investigations, and where firms respond directly to customers through online blogs.

The same is true for communications. When, on May 11, 2023, Wahi was asked to attend an in-person meeting he immediately took a photo, which he shared with his two co-conspirators. The photo of this email proved critical in making the case that Wahi was looking to leave the country by virtue of his wrongdoing surrounding Coinbase trades.

Communication is critical to the operation of business services. Communication is also critical to the investigations and evidentiary burdens when business goes wrong.

Given the current state of play, it is fair to assume that we may soon be at an interesting intersection for cryptocurrency-based organizations – one in which they will face greater regulatory scrutiny. In turn, it is likely that they will be tasked with the same strict burdens around communication capture, storage, and monitoring, as other well-established financial institutions.

Crypto firms who value compliance should look now at solutions for communications. Change is fast, and regulatory compliance will be next.