Last year, our firm published a New York Law Journal article predicting that regulators, including the U.S. Securities and Exchange Commission (SEC), would soon bring enforcement actions alleging insider trading in digital assets. See N. Heller and S. Enzer, “Crypto Insider Trading: What Exchanges Should Know,” New York Law Journal (Dec. 6, 2021). That prediction has since come true. In a recent enforcement action accusing a former Coinbase employee and two associates of trading cryptocurrency tokens based on inside information that they allegedly misappropriated from Coinbase, the SEC asserted for the first time that nine of the tokens involved in the charged insider trading scheme were unregistered “securities” and that the scheme therefore constituted securities fraud in violation of SEC Rule 10b-5. See SEC v. Wahi, 22 Civ. 01009, Dkt. 1 (Compl.) (W.D. Wa. July 21, 2022).

The risk of the SEC designating cryptocurrency tokens as securities after they have been publicly traded, without prior warning to cryptocurrency market participants, can create a significant compliance challenge for many fintech companies.