Coinbase argues for dismissal of SEC's allegations of securities violations

Coinbase, one of the largest crypto exchanges globally, pushed back on Wednesday during a hearing to determine whether it violated securities laws. Coinbase is seeking to have the lawsuit dismissed.

The U.S. Securities and Exchange Commission filed the lawsuit in June 2023, just one day after suing Binance, the largest crypto exchange by volume, over similar securities issues.

Coinbase chief legal officer anticipates new crypto regulations following SEC lawsuits

In the SEC's case against Coinbase, it claimed that 13 cryptocurrencies available for trading on the platform were securities. Some of the major tokens included in this list are Solana, Cardano, and Polygon. While the Binance lawsuit also mentioned 12 crypto assets as securities, there were six overlapping tokens identified as securities by both the SEC: SOL, ADA, MATIC, FIL, SAND, and AXS.

Coinbase has asked New York District Judge Katherine Polk Failla to dismiss the lawsuit, arguing that cryptocurrencies should not be treated as company shares and fall outside the SEC's jurisdiction. The exchange, along with other crypto companies, believes that the SEC is overreaching its authority.

Failla questioned the SEC during the Manhattan court hearing, asking the agency to explain the characteristics of crypto assets that constitute investment contracts. She expressed concerns that the SEC was seeking to expand the definition of securities.

Patrick Costello, an SEC assistant chief litigation counsel, argued that because crypto assets are often connected to a blockchain network or enterprise, they share similarities with investment contracts. The agency contended that Coinbase was attempting to create its own legal framework akin to the Howey test used in determining investment contracts.

While the SEC has a history of successful lawsuits, recent losses in crypto-related cases involving Ripple and Grayscale have left some optimistic about Coinbase's potential outcome. Jake Chervinsky, chief legal officer at Variant Fund, noted concerns raised by Failla regarding the SEC's understanding of the technology. Despite this, Chervinsky emphasized that the fight continues, suggesting that the industry has a strong position in the legal battle.

SEC director affirms enforcement stance amidst crypto industry turbulence

Following a five-hour hearing, Failla stated that she had questions and partial answers but refrained from making a ruling on Wednesday. Dave Rodman, founder and managing partner of Rodman Law Group, expressed doubts about the likelihood of the judge ruling in favor of Coinbase, citing the rarity of dismissing a lawsuit at this stage. He highlighted the unique situation where a regulator, the SEC, approved Coinbase for listing on the U.S. stock exchange prior to its public offering in 2021.

Crypto enforcement remains rigorous in 2023, with no signs of easing in 2024

The ongoing hearing poses a significant moment for the crypto industry, which has faced regulatory challenges through enforcement actions rather than new policy developments. The pending ruling or dismissal by the judge could have far-reaching implications on the regulation of cryptocurrencies in the U.S. If the motion is not dismissed and the SEC prevails, the cryptocurrencies mentioned in the suit could be deemed securities, subjecting them to similar regulatory requirements as publicly traded companies.

However, the potential challenges arise from designating the blockchain underlying the token as an owner, contradicting the decentralized nature of blockchains. Conversely, if Coinbase succeeds in the motion to dismiss, it could stimulate discussions and policy formations concerning the classification of crypto assets and their protection for U.S. investors. Presently, the SEC views most crypto assets (excluding Bitcoin) as securities, while the CFTC classifies certain digital assets as commodities, including Bitcoin, ether, Litecoin, tether, and Binance USD.

Are cryptocurrencies commodities or securities? Views differ across US regulatory agencies