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Coinbase Claims SEC Has No Authority to Sue, Calls For Dismissal of Lawsuit

The outcome of this legal battle holds significant consequences for Coinbase's future as a viable business.
PUBLISHED JUL 1, 2023
Cover Image Source: GettyImages | Justin Sullivan  Staff
Cover Image Source: GettyImages | Justin Sullivan Staff

Coinbase Global, the largest US crypto exchange, finds itself embroiled in a legal war with the U.S. Securities and Exchange Commission (SEC). The SEC alleges that Coinbase violated securities law by operating as an unregistered securities exchange, broker, and clearing agency. At the heart of the SEC's case is the assertion that 13 cryptocurrencies traded on the Coinbase platform are securities, thus falling under regulatory scrutiny. The SEC will present its response to Coinbase's first legal defense on July 13.



 

The SEC's lawsuit against Coinbase alleges that the company operated without registering its business and conducted unauthorized trading activities. The SEC argues that Coinbase violated securities regulations by offering unregistered securities to investors. This legal action is part of the SEC's wider initiative to regulate the cryptocurrency industry. By scrutinizing Coinbase's operations, the SEC aims to establish regulatory oversight and enforce compliance with securities laws within the crypto market. The outcome of this case will likely have implications for how cryptocurrencies are traded and regulated in the future.

Cover Image Source: GettyImages | Mark Wilson  Staff
Cover Image Source: GettyImages | Mark Wilson Staff

Coinbase strongly defends itself against the SEC's allegations by asserting that the tokens named, such as Sol, ADA, and MATIC, should not be considered securities. According to Coinbase, these tokens do not meet the legal criteria to fall under the SEC's regulatory authority. In support of its position, Coinbase has submitted a letter and an extensive 177-page filing, providing a comprehensive defense of its stance. The company aims to demonstrate that the SEC's claims lack merit and that the tokens in question should not be subject to securities regulations.

Source: GettyImages | Justin Sullivan  Staff
Source: GettyImages | Justin Sullivan Staff

The question of defining securities holds immense significance in the SEC's mission to regulate the cryptocurrency industry. The classification of certain cryptocurrencies as securities has far-reaching consequences for their trading mechanisms, registration obligations, and the functioning of the overall market. The outcome of the legal battle between Coinbase and the SEC will have a lasting impact on the regulatory landscape surrounding cryptocurrencies, influencing how they are treated and governed by regulatory authorities. This case will set a precedent for future discussions on the regulatory framework for digital assets.

Source: GettyImages | Spencer Platt  Staff
Source: GettyImages | Spencer Platt Staff

To evaluate digital assets as securities, the SEC employs the 'Howey Test.' This test derives from a 1946 Supreme Court case involving investment contracts for Florida orange groves. According to the Supreme Court, a security refers to an investment of money in a common enterprise with profits dependent on the efforts of others. Bitcoin, in particular, has been defended by its proponents as not meeting this test, given its decentralized nature and open-source origin.

Both, SEC Chair Gary Gensler and former Chair Jay Clayton have indicated in numerous public comments they do not believe Bitcoin is a security. Shortly after assuming his position as securities regulator head, Gensler acknowledged the need for regulatory clarity in the crypto market. "There is not a market regulator around these crypto exchanges," he stated, emphasizing that Congress should be the one to address the issue. However, the SEC's stance on the classification of Bitcoin continues to be debated and interpreted in various ways.

Source: GettyImages | Justin Sullivan  Staff
Source: GettyImages | Justin Sullivan Staff

Coinbase's lawyers have emphasized a regulatory gap in the SEC's approach to cryptocurrencies. They argue that the agency lacks a viable path for crypto issuers or companies offering cryptocurrencies to register with the SEC. Coinbase, having undergone extensive engagement with the SEC before its IPO, asserts that the SEC never indicated any violation regarding its business operations. The outcome of this legal battle holds significant consequences for Coinbase's future as a viable business.



 

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