Coinbase Ex-Executive Convicted Of Insider Trading Is Crypto’s Latest Legal Hope

But Mr. Wahi is still fighting the Securities and Exchange Commission, which has sued him for saying some of the Coinbase assets were securities. The outcome of that civil case is unlikely to change the future of Mr. Wahi, obscured by his prosecution and likely jail term. But it could affect how digital assets are regulated in the US

In a motion seeking an early dismissal of the case in Seattle Federal Court, attorneys for Mr. Wahi that the SEC has no role because Coinbase’s digital assets are not securities. Prosecutors charged him with conspiracy to commit wire fraud, not securities fraud.

Opposing the SEC in lawsuits like the one against Mr. Wahi has become the crypto industry’s best hope of kicking back the commission’s campaign to regulate digital assets. The industry hopes federal judges will find that crypto is too different from traditional stocks and bonds to fall under the rules written for Wall Street.

Because Coinbase is also a target of an SEC enforcement investigation, Mr. Wahi’s outlook is in line with the company’s, even as it fired him and cooperated with the investigation into his role in insider trading.

SEC staff told Coinbase last week that it will likely recommend enforcement action against the company for listing assets that regulators believe are securities, among other suspected violations, the company said. If the SEC sues Coinbase, the outcome could force the company to stop trading some of the digital assets it offers its users and potentially change the growth of the industry.

Regulators’ civil case against Mr. Wahi, already underway, will likely be played out before a broader lawsuit against Coinbase is resolved, and its outcome could set a precedent for what assets the SEC can oversee.

“This goes beyond the impact of the previous enforcement cases where the whole thing came down to that early point in a token’s life, when the company exchanges it for cash,” said Nick Morgan, a Los Angeles attorney whose nonprofit, Investor Choice Advocates Network represents people fighting what it calls SEC overreach. “The Wahi case has a much greater impact because by definition it involves secondary and not initial transactions.”

Mr Morgan’s ICAN group is one of several organizations that have filed friend-of-the-courts in support of Mr Wahi’s arguments. The Digital Chamber of Commerce and the Blockchain Association, two crypto trading groups, also filed instructions attacking the SEC’s case. Coinbase has asked the court to allow the company to file its views.

An SEC spokesperson declined to comment. A Coinbase spokeswoman declined to comment, but pointed to recent statements on Twitter from Paul Grewal, the company’s chief legal officer. The SEC could have created “practical, sustainable solutions such as developing rules or registration options” for the industry, Mr Grewal wrote, but instead filed a “misguided lawsuit”.

Jones Day law firm represents Mr. Wahi filed a motion to dismiss the case in February. Coinbase is not paying for Mr. Wahi’s lawyers, according to two people familiar with the case. A Jones Day spokesperson did not respond to repeated messages asking who is funding the work.

In their motion, Jones Day’s attorneys say the SEC’s efforts to scrutinize crypto violate the big questions doctrine recently passed by the Supreme Court. The standard restricts regulators from writing rules or taking other steps that are of major economic or political significance without what the majority of justices consider explicit direction from Congress.

Jones Day also attacks the SEC’s reliance on a 76-year-old Supreme Court test known as Howey to regulate many crypto projects. The Howey case provided a definition for an “investment contract,” a type of security that can be regulated by the SEC.

“The SEC should not use the phrase ‘investment contract’ as a blank check to cash when it seeks to expand its regulatory scope,” wrote Jones Day and other attorneys for Mr. Wahi in the briefing.

At his hearing on the wire fraud allegations in February, Mr. Wahi admitted to tipping his brother and Mr. Ramani, but said he “relied on the statements made by Coinbase and others that these cryptocurrencies are not securities.” He apologized and said he would lose “all the life I’ve worked hard to build for the past 17 years,” according to court transcripts.

Mr. Wahi is expected to be sentenced in May. His brother, who pleaded guilty to the charges, was sentenced to 10 months in prison in January and ordered to forfeit $892,500 in trading profits.

Supporters of the SEC crypto enforcement campaign say a court should not consider Mr. Wahi a sympathetic defendant. “It’s just the latest example of the crypto industry’s tactics to litigate against any attempt by the SEC to enforce the law,” said Dennis Kelleher, CEO of Better Markets, a group pushing for tighter financial regulation.

Defendants who plead guilty to criminal charges of insider trading generally do not dispute the SEC’s civil charges. “The facts admitted in the criminal case are quite unappealing,” said Mr Morgan, who previously served as an SEC enforcement attorney.

Coinbase is also trying to intervene in Mr. Wahi’s case with a letter from a court friend. The company faces the prospect of an SEC lawsuit for violation of laws requiring registration as a licensed stock brokerage and exchange, according to a copy of the SEC enforcement notice known as a Wells notice.

“The SEC’s allegations in this case hinge on the agency’s false claim that Coinbase has listed digital assets that are securities,” the company’s lawyers wrote in a filing filed last week.

Write to Dave Michaels at dave.michaels@wsj.com