Court Allows SEC Lawsuit Against Coinbase: What You Need to Know

Coinbase SEC lawsuit intensifies as the court allows SEC to take legal action against major exchange Coinbase.
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Digital asset exchange Coinbase finds itself in hot water as the Securities and Exchange Commission (SEC) pushes forward with its lawsuit against the company for allegedly engaging in unregistered securities sales. Here’s a breakdown of the situation.

Coinbase SEC Lawsuit Background

Digital assets, often touted for their decentralized nature, are facing increased scrutiny from regulatory bodies like the SEC. The SEC has long sought to bring “cryptocurrencies” under its regulatory umbrella, and its latest move involves taking legal action against Coinbase, one of the largest exchanges in the United States.

The SEC is currently prosecuting Binance, another major digital asset exchange, for similar unregistered securities violations as Coinbase, plus fraud allegations for serving US customers from banned overseas platforms.

Related reading: SEC’s Battle on “Unregistered Securities”: What is the Regulator Up To?

SEC’s Allegations

The SEC accuses Coinbase of operating as an unregistered securities broker and exchange, facilitating trading of digital assets that should have been registered as securities. The lawsuit, filed in June, claims that Coinbase violated federal securities laws by failing to register with the SEC.

An SEC spokesperson stated:

“We’re pleased that yet another court has confirmed that, while the term ‘crypto’ may be relatively new, the framework that courts have used to identify securities for nearly 80 years still applies […] When intermediaries don’t register [as brokers], it’s investors who get hurt and the American financial markets that suffer. We will continue to protect investors against risks in the crypto markets when, as here, the securities laws are implicated.”

In June, Gary Gensler, the Chair of the SEC, stated in an interview with CNBC that platforms such as Coinbase, which “call themselves exchanges”, were “commingling a number of functions.”

Gensler added:

“We don’t see the New York Stock Exchange operating a hedge fund.”

Legal Battles

Despite Coinbase’s attempts to have the lawsuit dismissed, the courts have sided with the SEC, allowing the case to move forward. U.S. District Judge Katherine Polk Failla ruled that the SEC’s claims have merit, rejecting Coinbase’s arguments to dismiss the complaints.

Judge Failla stated in her ruling:

“The ‘crypto’ nomenclature may be of recent vintage, but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years […] Coinbase has no control over a user’s crypto-assets or transactions via Wallet, which product simply provides the technical infrastructure for users to arrange transactions on other [decentralized exchanges] in the market.”

Judge Failla determined that the SEC’s argument in the case met the standards set by the Howey test, a benchmark derived from a 1946 US Supreme Court case between the SEC and the WJ Howey Company, regarding investment contracts.

She added:

“The court finds that the SEC has adequately pleaded that Coinbase customers engaged in transactions involving the Crypto-Assets that amounted to ‘investment contracts’ under Howey.”

Judge Failla referenced lawsuits brought by the regulatory agency against Telegram and Terraform, highlighting: “Both the SEC and private litigants have brought several successful actions in this circuit predicated on crypto-assets falling within the Howey definition of an ‘investment contract’.”

Coinbase’s Response

Coinbase has vowed to continue fighting the SEC’s allegations in court. Paul Grewal, Coinbase’s Chief Legal Officer, expressed confidence in their legal arguments and stated, “We remain confident in our legal arguments, we look forward to proving we’re right, we are eager for the opportunity to take discovery from the SEC for the first time,”

“We were prepared for this, and we look forward to uncovering more about the SEC’s internal views and discussions on crypto regulation.”

Industry Implications

The outcome of this legal battle could have significant implications for the digital asset industry as a whole. If the SEC prevails, it could set a precedent for stricter regulation, potentially impacting other exchanges and digital asset firms.

Related reading: Regulatory “Siege” Underway For U.S. Exchanges — Warns Ex-SEC Official

News of the legal proceedings has had an impact on Coinbase’s market performance. Following the rulings, Coinbase’s shares experienced a decline, reflecting investor concerns over the outcome of the lawsuit and its potential ramifications for the company.

Looking Ahead

As the legal battle between Coinbase and the SEC unfolds, the bitcoin industry awaits the outcome with bated breath. The case could shape the future of regulation in the United States and beyond, with implications for investors, exchanges, and the broader financial markets.

The SEC’s lawsuit against Coinbase marks a significant development in the ongoing debate over digital asset regulation. With the courts allowing the case to proceed, all eyes are on Coinbase as it prepares to defend itself against the allegations. As the legal proceedings continue, the outcome could have far-reaching consequences for the future of the broader digital asset industry.

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