Two months ago, the SEC brought its first ever alleged insider trading case arising from the purchase and sale of digital assets. The Commission charged Ishan Wahi, a former manager at Coinbase Global, with violations of §10(b) of the Securities Exchange Act of 1934, alleging Wahi violated his duty to Coinbase by disseminating material non-public information (MNPI) to his brother and a friend about the timing of token listings on the Coinbase platform. That same day, the U.S. Attorney for the Southern District of New York unsealed an indictment related to the same conduct. As many observers have noted, the Commission is attempting to break new ground in the Wahi case. But the SEC’s path to proving this case will be anything but smooth.

The biggest obstacle the Commission faces in proving insider trading is one of its own creation; its failure to provide the market with a clear picture of how the securities laws apply to digital assets will make it harder to prove that the tokens at issue qualify as “securities” under federal law. Indeed, at least one court has acknowledged that digital asset enforcement cases raise fundamental fairness concerns as well as due process considerations. Specifically, the SEC’s lack of a clear message to the market as to what is and is not a security may fail to provide issuers, exchanges, and traders with fair notice of the rules. The notice defense is sure to arise in this new token insider trading context—not least because the SEC alleges that Wahi shared tips about at least 25 tokens, only nine of which are alleged to be securities.

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