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Case Background
On June 6, 2023, the SEC sued Coinbase, alleging that it provided trading and staking services to the public in violation of federal securities laws. It also alleged that Coinbase Wallet acted as an unregistered broker-dealer. The SEC demanded that Coinbase return ill-gotten gains and pay corresponding prejudgment interest, impose civil penalties on Coinbase, and grant any equitable relief that may be appropriate or necessary to protect investor interests.
On June 29, 2023, Coinbase responded to the SEC's lawsuit in its filed answer, stating that the cryptocurrencies listed by the SEC were not investment contracts and therefore not securities within its jurisdiction. Coinbase also argued that its due process rights were violated when the SEC filed the lawsuit, and that the SEC's lawsuit may violate the "doctrine of primary jurisdiction."
On August 4, 2023, Coinbase filed documents to formally dismiss the SEC lawsuit, alleging that the regulatory agency had far exceeded its jurisdiction. Coinbase argued in the documents that the SEC did not claim that these examples involved investment contracts. Trades on the Coinbase platform and Prime do not involve commitments to reflect the future value of enterprise income, profits, or assets. They are sales of commodities, and once cryptocurrencies are delivered in exchange for payment, the obligations of both parties are fully discharged.
On October 25, 2023, Coinbase submitted a reply brief in the case, stating that because the SEC's complaint neither did nor could allege that its identified simple asset trades involved continuing contractual obligations related to enterprises, Coinbase had the right to judgment on the pleadings. The SEC believes that any purchasing behavior in which the buyer hopes for appreciation constitutes an investment contract and thus a security, attempting to fundamentally expand its own power, as explicitly stated by the doctrine of primary jurisdiction, if an agency wants to make decisions on significant issues, it must have the explicit support of Congress.
Judgment Details
Judge Katherine Polk Failla dismissed most of Coinbase's motions, finding that the regulatory agency had made "reasonable" allegations against the exchange. She set April 19 as the deadline for both parties to agree on a schedule for the case. While the judge indicated that the SEC seemed to have grounds to believe that certain tokens listed on the Wallet might meet the standard for "investment contracts," she dismissed this part of the lawsuit as Coinbase did not seem to act as a broker-dealer. She ruled that other aspects of the lawsuit could proceed, dismissing claims regarding the SEC's violation of the doctrine of primary jurisdiction or the Administrative Procedure Act.
Coinbase's Chief Legal Officer, Paul Grewal, commented: Early motions like ours against ZF entities are almost always denied. As this process continues and any necessary appeals, we encourage Congress to continue moving forward with comprehensive US digital asset legislation. It is critical if innovation is to stay in the United States. We also appreciate the court's understanding that Coinbase's technological innovations like the Wallet neither implicate nor are implicated by US securities laws.
Future Outlook
The case is currently in the trial phase, and the final judgment outcome remains uncertain, with various opinions on the direction of the case. Former US federal prosecutor and Cahill Gordon & Reindel LLP partner Samson Enzer predicted on January 27 that the judge would not dismiss the SEC's case against Coinbase at this stage because the threshold for the SEC to present enough evidence for disclosure was very low. Enzer stated that the current issue facing the court is whether, assuming the SEC's position is valid, there is enough evidence to present viable claims and proceed with discovery.
JW Verret, a former advisory committee member of the SEC, expressed that the ruling on the XRP case significantly increased Coinbase's chances of winning in the courtroom against the SEC. Bloomberg's senior litigation analyst, Elliott Stein, predicted in January of this year that Coinbase would prevail in its lawsuit against the SEC, believing that Coinbase's definition of "investment contracts" is more precise than that provided by the SEC, which could be a turning point in the case. He also mentioned that the ruling in the Ripple v. SEC case might have a positive impact on Coinbase's litigation.
Fox reporter Eleanor Terrett believes that there will be no clear "victory" until the conclusion of the case. But as far as this ruling is concerned, both sides have had victories. The SEC successfully convinced Judge Failla that it had a reasonable basis for most of the allegations against Coinbase. But similarly, Coinbase may persuade her during the discovery process. Failla also agreed with Coinbase's assertions about the Wallet. For all parties involved, the good news is that Judge Failla is actually very knowledgeable about cryptocurrencies/Web3 and is aware of the importance of the outcome of her case. |
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