Ishan Wahi, the product manager at the cryptocurrency exchange, and his brother Nikhil Wahi were arrested on Thursday in Seattle.
They and a third defendant, their friend Sameer Ramani, also face related U.S. Securities and Exchange Commission civil charges. Ramani is at large.
In a statement, lawyers for Ishan Wahi, 32, said he is "innocent of all wrongdoing and intends to defend himself vigorously." A lawyer for Nikhil Wahi did not immediately respond to requests for comment. Reuters could not immediately identify a lawyer for Ramani.
Prosecutors said Ishan Wahi shared confidential information about forthcoming announcements of new cryptocurrency assets that Coinbase would allow users to trade through its exchange.
They also said Ishan Wahi bought a one-way plane ticket to India after a Coinbase security director summoned him to the company's Seattle office for a meeting. Law enforcement barred him from boarding the May 16 flight, prosecutors said.
At Ishan Wahi's initial appearance in Seattle federal court, bail was set at $1 million, and he was ordered to surrender his passports. Prosecutors did not demand that he be detained despite his alleged attempt to flee. His next federal court appearance is on Aug. 2 in Manhattan.
In the related civil charges, the SEC alleged that Nikhil Wahi, 26, and Ramani, 33, purchased and sold at least 25 crypto assets for a profit, nine of which the agency said it had identified as securities.
An SEC official said its investigation was ongoing, and declined to say whether it would pursue action against Coinbase for listing the tokens deemed securities in the complaint.
Wahi and Ramani allegedly used ethereum blockchain wallets to acquire the assets and traded at least 14 times before Coinbase's announcements from June 2021 and April 2022, generating at least $1.5 million of illicit gains, prosecutors said.
"Fraud is fraud, whether it occurs on the blockchain or on Wall Street," Damian Williams, the U.S. Attorney in Manhattan, said in a statement.
Philip Martin, Coinbase's chief security officer, said the company had shared findings with prosecutors from an internal investigation into the trading.
"We are committed to doing our part to ensure that all market participants have access to the same information," Martin wrote on Twitter.
In a blog post, Coinbase acknowledged that the SEC had separately filed securities fraud charges against Ishan and Nikhil Wahi, as well as Ramani, but noted that federal prosecutors did not charge securities fraud.
"No assets listed on our platform are securities, and the SEC charges are an unfortunate distraction from today's appropriate law enforcement action," the blog post said.
Last month, federal prosecutors in Manhattan charged a former product manager at OpenSea, the largest online marketplace for non-fungible tokens, with insider trading in what the prosecutors described as the first such case involving digital assets.
The hearing, "Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States," is the latest from Congress to explore the issues concerning crypto assets.
10 months ago