SEC Wants Judge to Deny Coinbase’s Motion to Dismiss Lawsuit

The  Securities and Exchange Commission (SEC) has asked a federal judge to deny Coinbase’s motion to dismiss its lawsuit, which accuses the cryptocurrency exchange of offering unregistered securities in breach of the law.  

The SEC filed a lawsuit against Coinbase in June, accusing it of operating as a clearing agency, broker, and national securities exchange, without registration approval from the regulatory body.

The crypto exchange responded by filing a motion in August, requesting the case be dismissed. It claimed that the SEC lacked the jurisdiction to take legal action because its services and digital assets in question did not qualify to be classified as securities.

However, the SEC has countered Coinbase’s argument in a filing dated October 3.

“With the exception of the Wallet application, Coinbase does not here dispute it carried out the functions of exchange, broker, and clearing agency,” it said. `Thus, the Motion hinges on whether Coinbase intermediated transactions involving investment contracts and thus securities. It did.”

SEC Accuses Coinbase of Awareness

The SEC has maintained that some of the cryptocurrencies listed on Coinbase’s platform meet the criteria of the so-called Howey test and should be considered investment contracts subject to SEC registration. The agency emphasized that cryptocurrency issuers, including those listed on Coinbase, encouraged investors to expect the value of their investments to increase based on the issuer’s plans to develop and maintain the asset’s value.

The SEC alleged that Coinbase has been aware of this classification, and said Coinbase has known all along that a crypto asset bought and sold on its trading platform is a security if it meets the Howey test—as it recognized on its website as far back as 2016 and in its filings with the SEC, as well as in its continued internal efforts to analyze assets it was considering listing on its platform using the Howey test.

Coinbase’s Response

The regulatory agency also challenged Coinbase’s argument by referring to the “major questions doctrine,” which suggests that the SEC lacks the authority to regulate the cryptocurrency market until specifically authorized by Congress.

“The SEC has not assumed for itself any new power to do what the federal securities laws do not already expressly authorize it to do,” the SEC said. “The Motion therefore should be denied in its entirety and this case should proceed.”

Paul Grewal, Coinbase’s Chief Legal Officer, took to Twitter to express his dissatisfaction with the SEC’s filing alleging that “It’s more of the same old same old.”

The @SECgov just filed its opposition to our motion to dismiss their case against @Coinbase. It’s more of the same old same old. But don’t just take my word for it – take a look for yourself. 1/7 https://t.co/QMdkRoiq0V

— paulgrewal.eth (@iampaulgrewal) October 3, 2023

“A preliminary note: over and over again the SEC makes sweeping claims of what the law is/must be without any legal citation,” Grewal stated. 

He also argued that the assets listed on Coinbase’s platform are not securities and do not fall under the SEC’s jurisdiction.

He criticized the SEC’s stance, saying, “The SEC’s arguments today would mean that everything from Pokemon cards to stamps to Swiftie bracelets are also securities.” He emphasized that such an interpretation is not in line with existing law.

Industry Reaction

Miles Jennings, crypto general counsel at a16z, shared his perspective on the SEC’s response to Coinbase’s motion, pointing out perceived weaknesses in the SEC’s arguments. Jennings argued that even if the court were to accept the SEC’s main contention that investment contracts don’t require legal contracts, the SEC’s case should still fail. He criticized the SEC’s definition of an investment contract for its “endless breadth.”

The SEC’s opposition to @coinbase‘s motion has a lot of holes. Even if the court were to agree with the SEC’s main contention (that investment contracts don’t require legal contracts), the SEC’s case should still fail.

As we discussed in our brief in August, the SEC’s theory of… https://t.co/RTzlutSM9t

— miles jennings (@milesjennings) October 3, 2023

Coinbase said it plans to file a response on October 24.

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