's up guys and welcome back to wall street millennial on this channel and podcast. Podcast. We cover everything related to stocks and investing. It's no secret that coinbase been having a bad year since their direct listing in 2021.

Their share price has fallen by 80 wiping out 70 billion dollars of shareholder value their first quarter earnings were a complete disaster with revenue falling by 27 versus. The prior year and they reported a net loss of over 400 million dollars in addition to financial difficulties. They are now facing a massive regulatory problem which could become an existential threat to their business model on july 22nd. The sec announced charges against a former coinbase employee named ishan wahi for insider trading.

Whenever coinbase announces that it will list a new altcoin the price of said coin typically skyrockets in anticipation of buying pressure from coinbase users wahi would use his prior knowledge to purchase the coins. Beforehand and sell them almost immediately after the. Announcement he did this multiple times in 2021 making an alleged 15. Million dollars in ill gotten games.

The former coinbase employee now faces up to 20 years in prison on wire fraud charges coinbase. The company has not been charged with any crime in fact coinbase was the victim because it was their confidential information. That was improperly used by wahi. However if you look at the details of the sec charges.

The crypto giant has some serious cause for concern. The sec claims that wahi and his associates purchased 25 crypto assets as part of their insider trading scheme importantly at least nine of those crypto assets were securities up until now the crypto industry has functioned like the wild west with very little regulation. If the sec starts regulating crypto as securities. Which at this point is looking increasingly likely.

This will have massive implications for coinbase along with the entire crypto industry. This video is brought to you by skillshare thanks to skillshare you can learn new skills like video. Editing. Coding and just about anything else you could want to learn for me.

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So join myself and millions of other members discovering their new passions on skillshare today and now back to the video ishan wahi joined coinbase in 2020. As a product manager as part of his role he was involved in the decisions. And public announcements of new cryptocurrencies to be listed on the coinbase platform 2021 was a busy year for wahi as coinbase attempted to profit from the crypto bull market by listing a huge number of coins that year they tripled. The number of coins on the platform from 42 to 139 before being listed on coinbase.

These altcoins were only traded on less well known and often decentralized exchanges while sophisticated crypto traders would be able to trade on the decentralized exchanges millions of investors only access cryptocurrencies through coinbase thus. When a coin is listed on coinbase. The pool of available buyers increases dramatically leading to a predictable increase in price as a product manager ishan had prior knowledge of which kryptos coinbase was planning to list because he was involved in these discussions. Coinbase told.

Their employees that listing decisions were highly confidential. They were not allowed to buy these coins in advance of the announcement or disclose. This information to anyone outside of the company. But the temptation for easy trading profits was too great for ishan.

He secretly told his brother. And his friend about the listings. Ahead of time. They would then use anonymous ethereum wallets to buy the coins right before the listing announcements and dump.

Them. Shortly. After this strategy. Worked brilliantly for example on august 31st 2021.

They bought about thirty thousand dollars. Worth of a small cap altcoin. Called dereva dao. Just a few hours later.

Coinbase announced. The listing causing the price to more than. Double they repeated this strategy numerous times making an estimated 15. Million dollars in profits.

They would presumably divvy up these ill gotten gains amongst themselves after the fact in april of 2022. A twitter user who goes by a name kobe exposed the scheme while ethereum addresses can be anonymous. Anybody can see what they're doing. He found that one specific address bought hundreds of thousands of dollars of crypto coins.

24. Hours before this was publicly disclosed. While the address was anonymous ishan was one of only a very small number of people who had prior access to this information. So it was just a matter of time before he would be found out he bought a plane ticket to india in an attempt to flee the country.

But the authorities apprehended him before he could get to the airport. Now he and his two associates face up to 20 years in prison coinbase. Cooperated with the authorities by all accounts. Ishan was a rogue employee.

So coinbase the company likely won't have any direct legal liability. But it appears that the sec is using this case as a pretense to increase regulations on the crypto exchange. Something it has wanted to do for a long time in their official press release. The sec used very deliberate language to send a clear message they said that of the 25 cryptos he shot and his associates traded at least nine of them were securities they further.

Said quote we are not concerned with labels. But rather the economic realities of an offering in this case. Those realities affirmed that a number of the crypto assets. At issue were securities unquote.

The classification of crypto assets. Has long been a subject of heated debate. Some people think they should be considered commodities. Similar to gold others.

Think it should be a security similar to stocks and bonds whatever classification it ends up getting will have massive implications. Financial securities are heavily regulated to prevent fraud or market manipulation. They are required to register with the sec file regular paperwork and give substantial disclosure to investors and importantly stock brokerages must comply with stringent regulations around order execution restrictions on insider trading penny stock regulations and a whole host of other rules meant to protect investors failure to comply with these regulations can result in severe civil and some cases criminal. Penalties commodities like gold on the other hand do not require these types of disclosures.

Making them far simpler to transact up until now cryptocurrencies have not been regulated as securities. This gives exchanges like coinbase free reign to rapidly list huge numbers of new coins at a very rapid pace without providing standardized disclosures or performing due diligence ever since he was appointed last year sec chairman gary gensler has wanted to start regulating most cryptocurrencies as securities coinbase vigorously disagrees with this so who is right as it turns out this question was settled by the supreme court all the way back in 1946. When they created the so called howie test. The howie test defines a security as any investment of money into a common enterprise.

In which the investor expects to make a profit drive from the efforts of others for some assets. It is very easy to tell whether or not passes this test. Let's take the example of gold you may think that gold is undervalued and expect to make a profit by holding it. But no reasonable gold bug expects the value of the gold to increase because of the efforts of others.

It's an inanimate piece of metal and nobody can change its physical attributes on the other hand. Let's say you buy a share of barrick gold. Which is a gold mining company as a shareholder. You clearly expect to make profits based on the efforts of other people.

The employees of barrett gold will mine gold sell it and hopefully send this money to you in the form of a dividend. But what about bitcoin. Most people who buy bitcoin probably expect to make a profit on it. But bitcoin has no employees for all we know its anonymous founder may not even be alive.

Today. Thus. No reasonable investor should expect to make a profit derived from the efforts of others. Bitcoin.

Is clearly a commodity not a security and this has been the official position of the sec since 2018. But for many altcoins is a different story often the founder is a publicly known person who promotes the coin on social media. They solicit funding from investors and plan to use these funds to build some type of project that will increase the value of the coin at its core. It's really no different from how a founder of a startup may talk to investors on wall street to generate interest for an upcoming ipo.

The sec charges were technically related to the insider trading case against ishan wahi. But it's clear that they were using this as a trojan horse to argue that coinbase offers unregulated securities on its platform. They go into significant detail explaining why a number of the coinbase listed coins. Satisfied.

The howie test to be considered a security. One of these is a token called amp. Which was created by a company called flexa network incorporated flexa operates a payment gateway. Which allows merchants to accept crypto payments from consumers.

The merchant pays flexo transaction fee to use this service people who buy the amp token can stake their coins into collateral pools. Which are used to generate the merchant transactions flexa takes a portion of the transaction visa charges to the merchants and uses us to buy amp. Tokens on the open market these amp tokens. Are then distributed to the collateral pool of investors as compensation while they don't call this a dividend that's effectively what it is you buy amp.

Tokens and stake them into the collateral pool with the expectation that you'll get more amp. Tokens and the profits. You can reap as an investor depend on how successful flex's business operations are this is very similar to if you bought shares in a company. Let's say you bought a share in apple stock.

The more iphones they sell the more dividends. They'll be able to pay you while i'm not a lawyer to me it seems like the amp token is clearly a security people who buy the token have an expectation for profits. Which is dependent on the efforts of flex's employees in response coinbase's chief legal officer. Said coinbase does not list securities end of story as evidence he points to the company's process for approving new crypto listings.

One of the steps in the process is to perform a multi factorial analysis. That takes into consideration a wide array of facts and circumstances as informed by our factual diligence. We have no idea what their multifactorial analysis consists of and coinbase has yet to publicly refute. The specific claims made by the sec and this is not the first time the sec has foreshadowed a potential crackdown last year.

Coinbase announced a new product called coinbase land which would allow users to earn yield by lending out their uscc coins. However. The sec said that they would view such a product as a security they threatened to sue. The company if they went ahead with it coinbase backed down and cancelled the product.

This conflict exposed a complete breakdown of communication between coinbase and the securities regulator in a twitter tirade ceo. Brian armstrong said that the sec refused to meet with him even when he personally traveled to washington dc. It looks like time for negotiations is over and these issues will ultimately be battled out in the courtroom. If coinbase loses.

It could spell disaster for the entire crypto industry. One of the key benefits of crypto is that it's extremely easy for an entrepreneur to start up. A new project and raise new money through an initial coin. Offering.

Pretty much anyone with a little bit of computer. Science experience can do it. Because of this. The number of altcoins has exploded with over 7 000.

New coins being developed over the past two years entrepreneurs are basically using the crypto market to bypass. All the paperwork and due diligence associated with a traditional financial system. Coinbase was a big beneficiary of this they currently have over 200 coins on the platform. The majority of these coins are at risk of being labeled securities.

There's a strong argument that ethereum. The second largest cryptocurrency is a security in a recent interview on the altcoin daily youtube channel. Michael saylor. Said that ethereum is obviously a security.

The coin went public through an ico. It has a management team and the functionalities of the coin can be changed. If these coins are officially considered securities. Many of them may not be willing or able to comply with all the applicable regulations and coinbase may be forced to de list them currently bitcoin only makes up 25 of coinbase's transaction revenue.

This means that 75 of coinbase's transaction revenue is potentially at risk beyond transaction revenue coinbase seeks to make money by investing in crypto related startups. Many of which have their own coins in some cases. These coins are subsequently listed on the coinbase platform for example this past december. Coinbase listed.

A coin called dso immediately after the listing. Announcement. Its price. Nearly doubled before eventually crashing by more than 90.

Dso was created by a company. Called decentralized social. A financial times investigation found that coinbase had made an investment in decentralized social prior to the listing of the diesel coin and at the time they did not disclose this on their coinbase ventures website to be clear coinbase did not buy any diesel coins. So.

This was not a pump and dump scheme or anything like that but at the very least. It could give the appearance of a conflict of interest that's the problem with an unregulated market. There is no standardized set of investor protections as an individual investor you have very little idea about what's going on behind the scenes keep in mind that this video is not financial advice and i personally have no stake in coinbase stock. Either long or short at this point.

Nobody knows for sure how this regulatory situation will play out. But it's safe to say that coinbase is in a very risky situation the pro crypto community often decry the impending regulatory crackdown. By saying you will stifle innovation. The crypto industry has been the wild west for the past decade with almost no regulation.

They've had all this time to innovate unencumbered by heavy handed regulators. So what have they been able to accomplish we've had numerous ponzi schemes. Where investors have lost tens of billions of dollars. We've had algorithmic stablecoins.

Which have also been a complete disaster with investors losing 60 billion dollars from the taro luna project. Alone and finally a huge number of leveraged bitcoin derivatives have also been created which allow retail investors to lose their life savings in a matter of hours aside from the occasional gimmick. Almost nobody uses crypto for day to day transactions or anything else that creates any value in the real world. The one major exception is ransomware hackers.

Who love to use anonymous cryptocurrencies to collect payments from their victims. But for 99 of use cases. The so called innovations in the space have amounted to little more than new user interfaces on the crypto casino. All right guys that wraps it up for this video.

Do you think cryptocurrencies should be regulated as securities let us know in the comments section below also don't forget to check out our daily business and finance email newsletter at wallstreetmillennialcom newsletter as always thank you so much for watching and we'll see you in the next one wall street millennial signing out.