How Blockchain’s Transparency Revealed Insider Trading at Coinbase
A former Coinbase (NASDAQ: ) executive and two others are facing insider trading charges from the SEC after a Twitter user flags their activities through the blockchain.
Yesterday, Ishan Wahi, a former Coinbase employee, his brother and a friend were charged with insider trading by the US Securities and Exchange Commission (SEC). The regulator alleged that the trio orchestrated a scheme to buy several crypto assets before they were listed on the cryptocurrency exchange.
Meanwhile, parallel to the SEC’s charges, the US Attorney’s Office for the Southern District of New York also dropped an indictment against the trio. The three men were charged with the first cryptocurrency insider trading tip scheme in a statement. Consequently, the US Department of Justice (DOJ) revealed that federal agents arrested the Wahi brothers on Thursday morning. However, their accomplice, Sameer Ramani, is still at large.
Insider trading by Coinbase employee
The SEC alleges that Ishan had secretly used the knowledge he gained while assisting with the exchange’s public token listings to trade digital assets. He repeatedly provided his brother Nikhil and Sameer with the timing and content of upcoming listing announcements on Coinbase.
As an employee of Coinbase, Ishan helped organize Coinbase’s public listing announcements. These usually contained information about cryptoassets or tokens that would be made available for trading on the platform. The exchange, for its part, treated such disclosures as confidential, and repeatedly warned its employees not to use them as a basis for trading or to tip off third parties.
But in a clear violation of company policy, Ishan consistently tipped off his accomplices between June 2021 and April 2022. Nikhil and Ramani allegedly bought at least 25 crypto assets, of which at least nine were securities, ahead of their announcements.
With the eventual disclosures usually causing an increase in the asset price, they usually sold them at a profit immediately after the announcements. The extensive insider trading scheme resulted in more than $1.1 million in ill-gotten gains and eventually landed them in trouble.
Blockchain technology helps stop the Charade
Unfortunately for the Wahi brothers and Sameer, their entire operation was flagged by cryptocurrency influencer Jordan Fish. Tracking data on the blockchain, he noticed an ETH address buying tokens exclusively in the Coinbase Asset Listing post. These purchases were made about 24 hours before Coinbase published the announcements.
A blockchain is a decentralized, immutable database that makes it easier to track assets and record transactions across a corporate network. These assets can be physical (home, car, money or land) or intangible (intellectual property, patents, copyright, branding). On a blockchain network, virtually anything of value can be recorded and traded, reducing risk and increasing efficiency for all parties. By using smart contracts, some blockchains work without human intervention.
Following Fish’s disclosure, Coinbase made several changes to its token listing procedure in light of the insider trading allegations. The company’s CEO, Brian Armstrong, also revealed that the exchange immediately took action and conducted an investigation. This led to the identification of the suspects and ultimately the termination of Ishan’s job.
Incidentally, Coinbase, which was recently named the best crypto exchange, has been at the forefront of the fight against securities breaches. In 2019, it launched a crypto rating board to help assess how likely a digital asset is to violate US securities laws. Despite its best efforts, the insider trading problem still plagued the company. Reports show that over $1.7 million was generated in profits through this illegal activity as of February 2021.
Following his arrest, it was revealed that Ishan Wahi attempted to flee the US following Fish’s tweet and Coinbase’s investigation. The DOJ has charged Ishan Wahi with two counts of conspiracy to commit wire fraud and two counts of wire fraud. On the other hand, Nikhil Wahi and Sameer Ramani were each charged with one count of wire fraud conspiracy and one count of wire fraud.
Meanwhile, the SEC claims that at least nine of the digital assets involved are securities and has targeted the firms and tokens listed. The digital assets involved are Amp, RLY, DDX, XYO, RGT, LCX, POWR, DFX and KROM. However, its stance has drawn a rebuke from fellow market regulator the Commodity Futures Trading Commission (CFTC).
“The SEC’s allegations could have broad implications beyond this single case, and underscore how critical and urgent it is for regulators to work together. Regulatory clarity comes from being out in the open, not in the dark.”