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SEC action against Coinbase affirmed by judge

arsheffield | Flickr

After the Securities and Exchange Commission sued Coinbase Inc. on June 6, 2023, Coinbase filed a motion to dismiss. On March 27, New York Southern District Judge Katherine Polk Failla ruled the SEC’s claims that Coinbase offered, sold and served as an intermediary for securities without being registered to do so justified allowing the SEC to move forward with the case.

In the lawsuit, the SEC claimed that Coinbase was supposed to register as an exchange and be overseen by federal regulators. It also claimed at least 13 crypto assets traded within Coinbase are securities and need to be registered with regulators before issuing them to the public, according to the Wall Street Journal.

In January 2024, Coinbase filed to dismiss the case on the grounds the SEC has no jurisdiction over cryptocurrency.

During the court hearing in January, Failla questioned the SEC on whether letting the agency regulate Coinbase would give it market authority it does not currently have. The judge told the SEC that she has concerns over their argument sweeping “too broadly.”

In response, the SEC cited a 78-year-old Supreme Court ruling that defined investment contracts as a class of securities different from stocks and bonds. 

The SEC claimed that, according to that ruling, most cryptocurrencies are classified as investment contracts. Meanwhile, Coinbase argued that most cryptocurrencies are commodities that investors only hope will go up in value.

On March 27, Failla denied Coinbase’s motion to dismiss the case. The SEC is allowed to move forward with the claim that Coinbase sold and offered unregistered securities. However, the judge dismissed the claim that Coinbase acted as an unregistered broker with its crypto wallet.

The ruling means the case will now move into the discovery stage. The judge said that despite cryptocurrency being a fairly new notion, it fits within an existing framework that has been used to identify securities for the past 80 years.

 “While the term ‘crypto’ may be relatively new, the framework that courts have used to identify securities for nearly 80 years still applies,” an SEC spokesperson said.

Coinbase Chief Legal Officer Paul Grewal also spoke out about the courts’ decision in a thread on X, formerly known as Twitter. 

“We look forward to uncovering more about the SEC’s internal views and discussions on crypto regulation,” he said.

After the result of the hearing came out on March 27, the market quickly reacted to the court’s ruling. By the end of the day, shares of Coinbase fell by about 2.5%.

The lawsuit is part of an ongoing effort within the SEC to regulate the cryptocurrency market. Since becoming SEC’s chair in 2021, Gary Gensler vowed to start regulating cryptocurrency. Alongside the Coinbase case, the SEC also filed a lawsuit against Binance Holdings Ltd. in June 2023 and another in November 2023.

The attempt to control cryptocurrency comes as no surprise; it follows years of failures by companies since the onset of crypto’s boom, including FTX, which mismanaged customer funds.

Gensler referred to the crypto industry as the “Wild West,” making his effort to regulate the cryptocurrency market clear.

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