March 28, 2024 at 11:08 GMTModified date: March 28, 2024 at 11:08 GMT
March 28, 2024 at 11:08 GMT

Major setback for Coinbase as court finds SEC lawsuit plausible

The heart of the SEC’s lawsuit, filed last June, accuses Coinbase of acting as an unregistered securities exchange, broker, and clearing agency.

Major setback for Coinbase as court finds SEC lawsuit plausible

Leading cryptocurrency exchange, Coinbase, is facing significant legal challenges from the US Securities and Exchange Commission (SEC).

In a pivotal decision, a New York federal district judge largely sided with the SEC in its lawsuit against the cryptocurrency giant.

The ruling, delivered by Judge Katherine Polk Failla, disputed Coinbase’s motion to dismiss the SEC’s lawsuit, which alleges Coinbase operated without proper registration.

The crux of the lawsuit is the SEC’s claim that Coinbase has been operating as an unregistered securities exchange, broker, and clearing agency.

Judge Failla’s order highlighted that the regulatory watchdog presented a “plausible” argument, warranting further examination in court.

While the judge acknowledged the novelty of the “crypto” terminology, she affirmed that the transactions in question fit well within the legal framework established nearly eight decades ago for identifying securities.

This perspective highlighted the court’s intention to apply traditional securities laws to the evolving digital asset space.

Coinbase Wallet: A partial victory

The SEC’s lawsuit hinges on the assertion that Coinbase, by offering trading and staking services to the general public, along with its Wallet app, is in violation of federal securities laws. 

A notable aspect of the judge’s ruling addressed the SEC’s contention that some tokens listed on Coinbase’s Wallet might qualify as “investment contracts.” 

The regulatory body’s argument received partial validation from the court, particularly concerning Coinbase’s overall operations. 

However, the judge did find merit in Coinbase’s argument regarding the Wallet app’s functionality, leading to the dismissal of one out of five charges.

Coinbase’s argument that its Wallet app merely provides a technical framework for cryptocurrency transactions, without acting as a broker or exchange, found favour with the court. 

Judge Failla pointed out that the Wallet app allows users to manage their own crypto keys and does not control user transactions or assets. 

This differentiation led to the dismissal of the SEC’s claim that Coinbase acted as an unregistered broker through its Wallet app.

Furthermore, the court dismissed the SEC’s accusations that its lawsuit against Coinbase violated the Major Questions Doctrine or the Administrative Procedures Act. 

Judge Failla highlighted that Coinbase had been sufficiently warned of the SEC’s increasing scrutiny of crypto companies, referencing the DAO Report and previous cases as indicators of the regulatory landscape’s evolution.

The road ahead

Despite the partial victory for Coinbase regarding the Wallet app, the broader implications of Judge Failla’s ruling are significant. 

The Judge’s decision to proceed with the lawsuit against Coinbase on most counts sets the stage for a detailed examination of how cryptocurrencies are classified and regulated. 

Importantly, the ruling indicates that the traditional definitions of securities, as established by the Howey test, apply to crypto assets, reinforcing the SEC’s regulatory authority over the industry.

Coinbase, through its chief legal officer Paul Grewal, has expressed readiness to continue the legal battle, seeking clarity on cryptocurrency regulations.

The SEC’s successful argument that traditional securities frameworks apply to cryptocurrencies signals a pivotal moment for the industry, potentially leading to stricter regulations and operational changes for crypto exchanges. 

This case, along with the SEC’s ongoing lawsuit against Binance, underscores the regulatory challenges facing the cryptocurrency industry.