U.S. Judge Allows SEC Lawsuit Against Coinbase to Advance

A U.S. judge denied Coinbase's motion to dismiss the SEC's lawsuit alleging it facilitated unregistered trading and sales of crypto securities.

Key Insights

  • A U.S. judge denied Coinbase’s motion to dismiss the SEC’s case alleging it operated as an unregistered exchange
  • The judge ruled the SEC properly alleged Coinbase’s platform facilitated trading of investment contract securities
  • However, one claim that Coinbase Wallet operated as an unregistered broker was dismissed by the judge

NEW YORK (MarketsXplora) – A U.S. judge has ruled that Coinbase must defend itself at trial against Securities and Exchange Commission allegations that the cryptocurrency exchange facilitated unregistered trading of dozens of crypto asset securities.

In a decision on Wednesday, U.S. District Judge Katherine Polk Failla in Manhattan denied a Coinbase motion to dismiss the bulk of the SEC case, which revolves around whether certain crypto transactions on Coinbase’s platform amounted to investment contracts under a long-standing legal test.

Judge Failla said the SEC had “sufficiently pleaded” that Coinbase operated as an unregistered exchange, broker and clearing agency by facilitating trades of crypto assets understood to be securities.

The judge also said the SEC had properly alleged Coinbase’s staking program, which generates crypto rewards for holding certain tokens, involved the unregistered sale of securities.

However, Failla dismissed one SEC claim that Coinbase acted as an unregistered broker through its separate Coinbase Wallet service.

The case stems from the SEC’s crackdown on crypto trading platforms amid concerns they are facilitating the trading of potentially billions of dollars of illegal securities in unregistered transactions.

Coinbase, one of the world’s largest crypto bourses, has denied the SEC claims and argued the agency has violated fair notice in regulating the digital asset industry through enforcement actions rather than formal rulemaking.

“Coinbase … make(s) much hay out of a position taken by SEC Chair Gary Gensler in his May 2021 Congressional testimony … Yet an examination of the broader timeline … reveals that the SEC provided Coinbase fair notice” on securities law compliance, Failla said.

The judge rejected Coinbase’s bid to dismiss the case on the basis that the SEC lacked clear authority from Congress to police the crypto sector under the “major questions” legal doctrine.

“(The) cryptocurrency industry ‘falls far short of being a ‘portion of the American economy’ bearing ‘vast economic and political significance,'” Failla wrote.

While the case will proceed to trial based on Failla’s denial of Coinbase’s dismissal motion, any final resolution and legal precedents are likely still years away given the litigation’s complexity and near-certainty of appeals.

Samson Ononeme

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