Two crypto cases from the Feds and one glaring issue

• Securities have onerous rules around who can own and trade them, such that they would be of little use in a startup's product.

Catch up fast: The DoJ case in U.S. vs Wahi focuses on whether or not stolen information was used so that three traders could profit at the expense of others.

• Whether or not a token is a security has no impact on the DoJ indictment.
• Sources with knowledge of the matter explained to Axios that the fact that the defendants were using stolen information to make money at expense of others in the market should be enough to convince a court it was wire fraud.

However, most of the SEC's complaint is given over to making the case that some of the illicitly traded tokens qualify as securities.

• Nine different cryptocurrencies were specifically named as securities in the SEC case, out of 25 that both it and the Justice Department said were traded using privileged information.

The intrigue: Teams behind the nine tokens were likely surprised to learn yesterday that they had sold unregistered securities.

What they're saying: "The DOJ did not charge securities fraud," Coinbase, the dominant crypto exchange in the U.S., wrote in a blog post update yesterday. "No assets listed on our platform are securities, and the SEC charges are an unfortunate distraction from today’s appropriate law enforcement action."

• The key defendant in the case is a former Coinbase product manager, Ishan Wahi, 32, of Seattle, who was assigned to the company's asset listing team.
• He's alleged to have informed his brother, Nikhil Wahi, 26, also of Seattle, and a friend, Sameer Ramani, 33, of Houston, of which tokens to purchase ahead of listings.

"The case SEC v. Wahi is a striking example of 'regulation by enforcement,'" Commodity Futures Trading Commission member Caroline Pham wrote in a statement today. "Regulatory clarity comes from being out in the open, not in the dark."

Of note: The DoJ and the SEC have declined to share with Axios the full list of 25 tokens allegedly traded using privileged information.

• However, the DoJ indictment mentions TRIBE, ALCX, GALA and ENS, none of which are cited by the SEC (which should mean there are 12 more on the list).

State of play: The SEC could write rules for crypto, which would allow for public input and an open process.

• Thus far, the agency has declined to do so.
• Coinbase sent a 32-page letter asking for regulatory clarity yesterday. The company has previously argued that blockchain assets merit a new framework, outside the "security" and "commodity" dichotomy.
• Crypto proponents hope now that the U.S. Senate will bring legal clarity.

Flashback: Crypto companies have attempted over the years to gain specific compliance assurance from the SEC, but they aren't getting a thumbs up or down.

• The prior SEC chair said four years ago that his agency would be happy to find a way for companies to go to market in a compliant fashion, but it has rarely worked in practice.
• In 2018, one startup spoke about trying to ask permission, but three months later took the firm overseas (and has since shut down).

Early in 2017's token boom, some expected that the SEC would start issuing "no action letters" — basically, letters confirming that regulators had no concerns.

• Very few such letters have been issued, though.
• The first was for a private jet company that took 11 months of negotiation. There was another for a video game startup and one for a 3D-avatar company.
• Many more have been requested than have received formal responses.

The other side: "We are not concerned with labels, but rather the economic realities of an offering," Gurbir Grewal, director of the SEC’s Division of Enforcement, said in a statement.

The bottom line: Labels are important, however, when they are crucial to establishing the rules of the game.

• "The purpose here is to discourage misconduct before it happens," Congressman Brad Sherman (D-Calif.) reminded Grewal Monday before he testified at a House Financial Services subcomittee hearing.