On July 21, the Justice Department charged three people in the first cryptocurrency insider trading case. Ishan Wahi, former Coinbase product manager, reportedly shared confidential information with his brother Nikhil Wahi and a friend Sameer Ramani.
On the same day, Coinbase CEO Brian Armstrong posted a series of messages on Twitter claiming that the exchange actively monitors illegal activities. Not everyone is happy with the answer, as some members of the crypto community have criticized the time it took Coinbase to notice.
Ishan Wahi started working as Coinbase's product manager in October 2020, where he was involved in the process of adding new cryptocurrencies to the exchange. From at least August 2021 to May 2022, he was a member of a Coinbase private messaging channel for employees directly involved in the listing process. In that channel, employees discussed new digital asset quotes, including timing and announcement dates.
Cryptocurrencies often increase in value after Coinbase's announcement of their listing, due to the popularity of the exchange. There is even a term to define it: "Coinbase effect". Coinbase prohibits employees from sharing or exchanging non-public information, such as upcoming quote announcements.
Ishan Wahi reportedly tipped off Nikhil Wahi and Sameer Ramani at least 14 times from June 2021 to April 2022. He informed them of at least 25 cryptocurrencies Coinbase was planning to list. They bought these digital assets using anonymous cryptocurrency wallets. In total, the fraud, called front-running, resulted in about $ 1,5 million in earnings.
Evidence of the scheme first surfaced in April 2022. Ramani bought several cryptocurrencies that Coinbase included in a new listing announcement on April 11, 2022. The next day, Twitter user Cobie tweeted about the purchases and how this happened right before Coinbase's announcement.
An attempt to escape from the country
After Coinbase investigated, its director of security operations contacted Wahi and told him to attend an in-person meeting on May 16. The night before that date, Ishan Wahi bought a one-way flight to India that was supposed to leave shortly before the meeting. He also contacted Nikhil Wahi and Sameer Ramani to inform them of the investigation.
Law enforcement officers arrested Ishan Wahi before he could board the flight to India. He has to answer for two charges of criminal association aimed at telematic fraud and two charges of telematic fraud. Each charge has a maximum penalty of 20 years. Upon his first appearance in federal court, the bail was set at $ 1 million and he was ordered to hand over passports.
Nikhil Wahi and Sameer Ramani were charged with a conspiracy charge for computer fraud and a charge for computer fraud. Nikhil Wahi has been arrested, but Sameer Ramani remains on the loose.
A crackdown on insider trading is absolutely necessary
This is the second case of insider trading linked to Web3 technology in as many months. In June, the Justice Department accused a former OpenSea executive of insider trading. OpenSea is one of the most popular places to buy and sell non-fungible tokens (NFTs).
It is certainly good to see people facing consequences for cryptocurrency insider trading. It is a pervasive problem that affects all investors. The fraud also motivated Coinbase to change the way it lists cryptocurrencies.
The fact that Coinbase took so long to notice is worrying, and the stock market has rightly taken criticism for it. Coinbase claims to actively monitor this type of illegal activity. But insider trading went on for nearly a year and was only discovered when a Twitter user talked about it. That's not a pretty picture for what is considered to be one of the best cryptocurrency exchanges, by the way Bitcoin system for online trading.
While the consequences for cryptocurrency fraud are always welcome, these two cases are just the tip of the iceberg. Hopefully they lead to security best practices in the industry, because it's everyday retail investors who suffer the most from these scams.