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Judge Rules Crypto Assets Are Securities, Even When Traded on Exchanges
- A recent ruling in the Western District Court of Washington affirms that crypto assets are securities, even when traded on secondary markets like Coinbase.
- The US legal landscape is further complicated by differing legal interpretations, with some digital assets classified as commodities (like Bitcoin by the CFTC) and others in regulatory limbo.
- US regulatory enforcement actions and ambiguous decisions reflect ongoing challenges and discord in achieving regulatory clarity for the crypto industry.
The legal ambiguity in the US continues around what is and what isn’t a security and falls under the jurisdiction of the US Securities and Exchange Commission (SEC). As Fortune reports, in a new ruling in the Western District Court of Washington in relation to a case involving Coinbase, a federal judge has ruled that crypto assets constitute securities.
Related: Japanese Legislators Set to Allow Asset Managers to Hold Crypto
Judge Tana Lin said crypto assets fall under the SEC’s jurisdiction even though they are traded on a secondary market, such as Coinbase.
Previously The Commodity Futures Trading Commission (CFTC) declared in 2015 that only one digital asset would be classified a commodity and fall under the Commodity Exchange Act (CEA)—Bitcoin. This has since left any assets but Bitcoin in limbo.
Ripple had been sued by the SEC in 2020 over alleged sales of XRP as securities but US District Court Judge Analisa Torres ruled in July 2023 that sales on exchanges were not deemed securities—only those sold to institutional investors.
Judge Jed Rakoff, also at the Southern District of New York like Torres, disagreed with her reasoning and rejected differentiating between coins based on their sales method
The Court declines to draw a distinction between these coins based on their manner of sale, such that coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not.
Judge Jed Rakoff Crypto Space Further From Clarity Than Ever
This leaves the cryptocurrency sector in a state of uncertainty. Remember that in September of 2023 the New York Department of Financial Services (DFS) kicked several digital assets off its green list.
The DFS significantly reduced its list of approved tokens from 25 to just 8, excluding XRP, AAVE, Dogecoin (DOGE), the Basic Attention Token (BAT), Litecoin, and Bitcoin Cash—mainly leaving Bitcoin and Ethereum as well as some stablecoins on the list.
John E. Deaton, well-known lawyer and crypto advocate, now eyeing a US senate seat, slammed the decision and called it politically motivated.
SEC Alleges Insider Trading
In the case Judge Lin is presiding over, Ishan Wahi, a former product manager at Coinbase, and his brother, Nikhil Wahi, have settled with the SEC over insider trading charges. This involved trading on confidential information about which crypto assets were to be listed on the Coinbase platform ahead of public announcements.
According to the report in Fortune, the SEC is seeking a default judgement against a friend of the brothers, Sameer Ramani, believed to be in India, for his involvement in the case. Judge Lin ruled in favour of the SEC, determining that the sale of these crypto assets, even on secondary markets, should be considered securities transactions.
Related: Bitcoin Sets New Australian Dollar Record, Just Shy of 100K Amid ETF Frenzy
This decision was based on the fact that the tokens were extensively promoted by their issuers with the promise of an appreciation in value, and the issuers also facilitated their trading on secondary markets such as Coinbase.
The Court’s analysis remains the same even to the extent Ramani traded tokens on the secondary market. Each issuer continued to make such representation regarding the profitability of their tokens even as the tokens were traded on secondary markets.
Judge Tana Lin 
Author
Aaron Feuerstein
Aaron Feuerstein is a freelance writer based in Melbourne. His focus is on decentralised finance and the regulatory space surrounding blockchain. He holds a Master's in Accounting. When he is not studying the latest legal case, he enjoys his time as a modest but eager hobby cook.
