SEC Argues Against Coinbase's Bid to Dismiss Lawsuit

Police & Regulations
Oct 6, 2023 at 06:58 am

In an official submission made on Tuesday, the SEC refuted Coinbase's efforts to divert attention from what it views as significant deficiencies in their legal arguments. The Securities and Exchange Commission formally lodged a motion urging a federal judge to dismiss Coinbase's assertions.

The focal point of the dispute revolves around the judge's ultimate interpretation of a crucial precedent in securities law, commonly known as the Howey test.

On Tuesday, U.S. regulators argued that Coinbase's attempt to dismiss the alleged violation of securities law should be summarily rejected. They contended that the crypto exchange's rationale contains vital inadequacies.

In June, the SEC brought a lawsuit against Coinbase (COIN), alleging that the U.S.-based company failed to register as a securities exchange with the regulatory authority. Coinbase has been pushing for the case to be dismissed, urging the judge to issue a pre-trial ruling that distinguishes cryptocurrency transactions as separate from investment contracts.

The SEC firmly maintained that this plea should be dismissed. At the crux of the matter lies the eventual interpretation of the so-called Howey test: Coinbase posits a more restrictive viewpoint, while the SEC argues that Howey should be interpreted with flexibility and expansiveness when designating a security subject to regulation.

"The essence of this case revolves around whether Coinbase facilitated transactions involving 'investment contracts' and, consequently, whether customers on Coinbase's trading platform were entitled to the protections mandated by federal securities laws, which compel intermediaries of securities transactions to register with the SEC," stated the regulatory body.

Coinbase has asserted that cryptocurrency trades do not fall within the definition of an investment contract, citing the absence of a formal contract in a transaction.

"The prerequisite of a formal contract has never been established by any court," countered the SEC in its motion.

Paul Grewal, Coinbase's Chief Legal Officer, dismissed the SEC's contentions as "same old, same old" in posts on, formerly known as Twitter.

"We firmly maintain that the assets listed on our platform are not securities and do not fall within the SEC's jurisdiction," emphasized Grewal. "Recent court decisions have affirmed this stance."

The SEC holds a divergent viewpoint.

"In an attempt to divert attention from the significant flaws in its legal arguments, Coinbase seeks to shift blame onto the SEC for its current legal predicament," stated the SEC on Tuesday. "It contends that the SEC endorsed Coinbase's violative conduct when the company went public, that SEC Chair Gary Gensler's response to a question at a Congressional hearing (which Coinbase distorts) guides this Court's application of the federal securities laws, and that the SEC, in any case, lacks the authority to regulate securities transactions involving crypto assets."

The U.S. securities regulator also countered the argument that allowing Coinbase to go public did not inherently imply an endorsement that trading on its platform complied with securities laws.

"This lawsuit should not catch Coinbase by surprise. The company has been aware all along that a crypto asset bought and sold on its trading platform is a security if it satisfies the Howey test," referencing the court ruling that provided clarity on the legal framework surrounding investment contracts.

Read more: Elon Musk vs. SEC: Regulatory Ripples

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