The Securities and Exchange Commission's (SEC) case against Coinbase has been allowed to proceed by a US federal judge. Although one count was dismissed, the majority of the SEC's claims were upheld, confirming the agency's position in the cryptocurrency regulations debate.
US District Court Judge Katherine Polk Failla of the Southern District of New York denied most of Coinbase's motion to dismiss the SEC's lawsuit on Wednesday, finding that the regulator had a "plausible" case against the exchange. A deadline of 19 April has been set for the parties to agree on a schedule for the case.
SEC Lawsuit Against Coinbase
In June 2023, the SEC filed a lawsuit against Coinbase, alleging that the crypto exchange was operating as an unregistered broker and clearing house. Simultaneously, another lawsuit was filed against Binance, another well-known exchange.
"The SEC seems to have a plausible case against Coinbase." - Judge Katherine Polk Failla, U.S. District Court for the Southern District of New York.
The Securities and Exchange Commission (SEC) has accused Coinbase of violating federal securities laws by providing the public with trading and staking services. Additionally, the SEC alleges that Coinbase Wallet has been operating as an unregistered brokerage.
Coinbase, however, has vehemently opposed these allegations, arguing that crypto assets are fundamentally different from traditional securities like stocks and bonds.
Although the judge acknowledged that the SEC presented a case demonstrating that some of the digital assets listed on Wallet may qualify as 'investment contracts' under securities law, the ruling remains objective and does not make any subjective evaluations.
Today, the Court decided that our SEC case will move forward on most of the claims, but dismissed the claims against Coinbase Wallet. We were prepared for this, and we look forward to uncovering more about the SEC’s internal views and discussions on crypto regulation. 1/6
— paulgrewal.eth (@iampaulgrewal) March 27, 2024
Judge's Ruling
Judge Katherine Polk Failla ruled against the allegation that Coinbase was acting as a brokerage, although she agreed that some of the tokens on Coinbase Wallet could potentially be deemed 'investment contracts'.
However, the judge allowed the other aspects of the case to proceed, claiming that the SEC was exceeding its jurisdiction under the major issues doctrine or the Administrative Procedures Act. The judge said Coinbase had been duly notified that the SEC was pursuing cases against cryptocurrency companies.
In addition, the judge made an insightful observation about the nature of cryptographic tokens. She noted that when a customer buys a token on Coinbase's platform, they are buying the token's digital ecosystem. The value of the token is intrinsically linked to the growth of that ecosystem.
"When a customer purchases a token on Coinbase's platform, she is not just purchasing a token, which in and of itself is valueless; rather, she is buying into the token's digital ecosystem." - Judge Katherine Polk Failla.
Preliminary Victory for Coinbase
The judge's ruling on 27 March could be seen as a small victory for Coinbase, given that the SEC's allegations were dismissed. However, the court has largely favoured the SEC's position in the past, identifying the disputed crypto assets as securities that should be regulated. The court has ruled that issuers must register these assets with the SEC and provide comprehensive disclosures to inform potential investors about any associated risks.
The Implications of the Lawsuit
The implications of this lawsuit extend far beyond Coinbase. The outcome could potentially shape the future of the entire cryptocurrency industry in the U.S. If the SEC convinces the court to treat crypto exchanges in the same manner as national securities exchanges, it could impose new regulations and disclosure requirements on these trading platforms. Moreover, it could potentially limit the number of tokens available to retail investors.