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Coinbase SEC probe and crypto rally after Fed rate hike: The Crypto Mile weekly update

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Watch: The Crypto Mile weekly update: Coinbase SEC probe and crypto rally after Fed rate hike

Coinbase (COIN) is in trouble amid allegations of listing unregistered securities and insider trading, with its share price plummeting 78% this year.

Reacting to the turmoil at one of the world's largest centralised cryptocurrency exchanges, Cathie Wood's Ark Invest (ARKK) dumped more than $75m in Coinbase shares this week.

Read more: Crypto live prices

Overall, Ark Invest sold 1.41 million COIN shares — a blow for Coinbase as the investment firm was at one point the third-biggest shareholder in the company.

Brian Armstrong, CEO and Co-Founder of Coinbase, speaks at the 2022 Milken Institute Global Conference in Beverly Hills, California, U.S., May 2, 2022.  REUTERS/David Swanson
Brian Armstrong, CEO and co-founder of Coinbase, speaks at the 2022 Milken Institute Global Conference in California, 2 May 2022. Photo: David Swanson/Reuters

SEC probe into unregistered securities listed on Coinbase

A Coinbase employee was recently charged with the insider trading of cryptocurrencies.

The US Securities and Exchange Commission (SEC) said the defendants were involved in insider trading of nine tokens that were listed on the exchange.

The SEC is claiming these tokens were "crypto asset securities", with Coinbase arguing to the contrary, stating the tokens were not securities.

Sanjay Raghavan, head of web3/blockchain initiatives at Roofstock said that "the case is worth following as it can set a precedent on what types of tokens are 'investment contracts' under Howey".

The "Howey Test" is a regulatory framework in the US that determines whether a transaction qualifies as an investment contract and therefore can be considered as investing in a security.

Currently, the SEC has only made bitcoin (USD-BTC) and ethereum (USD-ETH) exempt from being classified as securities.

Mark Lurie, founder and CEO of Shipyard Software, likened the current climate to the run-up to the Wall Street Crash in 1929, saying that "many retail investors have lost money from cryptocurrency tokens".

Read more: The Crypto Mile weeky update from EthCC in Paris

He added: "These are problems we can probably all agree are bad for society. And it's understandable that the hard-working and well-meaning regulators at the SEC are trying to address them using the only tool they have at their disposal, securities regulation."

However, parts of the crypto-ecosystem differ from the normal definition of a security as each token strives, or claim to strive, towards greater and greater decentralisation.

This means there is no central authority or group that can run an enterprise for profit, which is a large part of what defines a security.

Lurie added: "But try as they might, the reality is that many are not securities, perhaps most obviously because the core of the pitch for virtually all token issuers is that the token is intended to be decentralised.

"Rather, the issuer is racing as fast as possible toward decentralisation, all the while explaining to buyers that they should not expect any one individual to create or distribute value to the token holders."

Lurie said the US Congress should "legislate for a new framework to regulate tokens that incorporates the reality that, like Napster and music file sharing, tokens will always happen in some form whether we like it or not".

"The SEC is wrong on the technicalities, but right in its intent, which is to protect retail investors, but the US Congress needs to step in and reconcile this gap," he said.

Federal Reserve Board Chairman Jerome Powell attends a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, U.S., July 27, 2022. REUTERS/Elizabeth Frantz
Federal Reserve chairman Jerome Powell. Photo: Elizabeth Frantz/Reuters

Federal Reserve rate hike sees crypto rally

On Wednesday, the Federal Reserve raised its benchmark interest rate by 0.75 percentage points as it looks to fight rampant inflation without tipping the economy into recession.

Ethereum and bitcoin rallied on the back of the hike.

Ethereum was up 10%, as sentiment remained bullish ahead of the long-awaited 'merge'.

Bitcoin saw a lift of 8% and the whole cryptocurrency market cap rose 7.2% to $1.1tn (£907bn).

Bitcoin briefly jumped above $23,000 as it attempted another rally after the plunge to $19,000 in June.

The move shows that bitcoin is correlating with US stocks, in particular the Nasdaq (^IXIC), which on Wednesday jumped 4%.

Watch: The Crypto Mile: Episode 5 The future of filmmaking and Web3

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