Coinbase Challenges SEC’s Broad Definition of Securities in New Court Filing

Coinbase, a leading cryptocurrency exchange, has taken a defiant stance in its ongoing legal battle with the United States Securities and Exchange Commission (SEC). The company’s latest move involves filing a “final petition” in response to the SEC’s regulatory assertions. 

In this petition, Coinbase contests the SEC’s broad definition of securities and argues that the regulatory body has overstepped its bounds.

In its October 24th filing submitted in the Southern District of New York, Coinbase made its position clear to Judge Katherine Polk Failla. This move was a response to the SEC’s assertions, which had been detailed in a 40-page rebuttal filed by the regulatory body earlier in the month.

Coinbase strongly criticized the SEC’s interpretation of what constitutes a security, deeming it unwarranted. The exchange went on to argue that the SEC was attempting to assert jurisdiction “over essentially all investment activity,” a power that, according to Coinbase, should rest solely with Congress, as established under the major questions doctrine.

The cryptocurrency lists on Coinbase, according to the filing, should not fall under the purview of the SEC. Coinbase, in its final plea, sought to have the lawsuit against it dismissed, which had been filed by the SEC in June. This move comes as Coinbase attempts to clear its name and secure its place in the evolving crypto regulatory landscape.

The @SECGov's opp. to our motion for judgment claims roving authority over all investments, with “security” and “contract” in the statutes performing no limiting function at all. As our reply shows, that's never been the law, and it's not the law now. 1/3 https://t.co/gVFyrJ8oIq

— paulgrewal.eth (@iampaulgrewal) October 24, 2023

Awaiting Judge Failla’s Verdict

The next steps in this legal battle now rest with Judge Failla. She has the option to request Coinbase and the SEC to present oral arguments in court. Following this, she can either make a judgment on the case, dismiss it entirely, or opt to proceed with a jury trial.

If Judge Failla does not choose to dismiss the case, Coinbase is eager to expedite the proceedings and move forward with a trial as quickly as possible. 

However, it’s worth noting that the discovery phase, where both parties exchange evidence, could extend for up to a year, potentially pushing a trial date to at least the first quarter of 2025, according to an individual familiar with the matter.

Judge Failla has been actively involved in crypto-related cases this year, issuing rulings that favored entities like DeFi giants Uniswap and Ripple. In July, she notably delved into the workings of DeFi exchanges that employ liquidity pools and found that Ripple’s XRP “is not necessarily a security on its face.”

Coinbase Gave A Bold Response

Coinbase’s latest filing is a robust response to the SEC’s October 3 rebuttal, in which the SEC urged the court to deny Coinbase’s motion to dismiss the case. The SEC initially sued Coinbase, along with Binance, in early June, alleging that the exchange had violated US securities laws by listing several tokens it considered securities without registering with the regulator.

The SEC’s allegations against Coinbase included facilitating trading in unregistered securities, resulting in the operation of an unregistered exchange, broker, and clearinghouse. The SEC’s complaint identified 13 tokens as securities, including Solana’s (SOL) token and Cardano’s (ADA) coin.

Additionally, the SEC accused Coinbase of offering and selling unregistered securities through its staking program, which allows investors to stake various tokens, all of which the SEC contends are investment contracts.

In August, Coinbase initiated efforts to have the lawsuit dismissed. Their rationale was the hope that the legal action would compel US regulators to establish clear and understandable rules and guidelines for the crypto industry.

Coinbase formally submitted a court motion in August, urging Judge Failla to dismiss the case. They argued that the SEC had “violated due process, abused its discretion, and deviated from its previous interpretations of securities laws.”

In response to these allegations, the SEC, in its opposition filing on October 3, accused Coinbase of attempting to divert attention from the critical shortcomings in its legal arguments by placing the blame on the SEC.

The SEC has maintained its stance that certain cryptocurrencies listed by Coinbase are investment contracts under the Howey test. The SEC argues that these tokens qualify as securities based on the criteria of “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Now, the fate of this legal battle is in the hands of Judge Failla, who will determine whether Coinbase’s arguments against the SEC’s broad definition of securities hold merit.