Edit: Cat Brother Wu Talks About Blockchain
On March 27, Judge Katherine Polk Failla of the Southern District of New York rejected most of Coinbase's motion, finding that Coinbase, as an unregistered exchange, broker, and clearing agency, engaged in unregistered securities issuance and sales through its staking program under federal securities laws. However, the court dismissed the SEC's accusation that Coinbase acted as an unregistered broker by providing its wallet application to customers.
Original Judgment:
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Reference:
Coinbase Loses Most of Motion to Dismiss SEC Lawsuit
Case Background
On June 6, 2023, the SEC sued Coinbase, alleging that it violated federal securities laws by offering trading and staking services to the public. It also claimed that Coinbase Wallet acted as an unregistered broker. The SEC sought the return of illegal profits, payment of corresponding prejudgment interest, civil penalties against Coinbase, and any equitable relief necessary to protect investor interests.
On June 29, Coinbase responded to the lawsuit filed by the SEC, stating that the cryptocurrencies listed by the SEC are 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 lawsuit may violate the "significant question" doctrine.
On August 4, Coinbase filed a formal motion to dismiss the SEC lawsuit, alleging that the regulatory agency exceeded its jurisdiction. Coinbase countered that the SEC did not claim that these examples involved investment contracts. The trades on the Coinbase platform and Prime did not involve contracts promising future value reflecting enterprise income, profit, or assets. They were commodity sales, and once the cryptocurrency was delivered in exchange for payment, both parties' obligations were fully discharged.
On October 25, Coinbase submitted a reply brief in the case, stating that because the SEC's complaint did not and could not allege that its identified simple asset transactions involved ongoing contractual obligations related to enterprises, Coinbase had the right to judgment on the complaint. The SEC's position that any purchase where the buyer hopes for appreciation constitutes an investment contract, and therefore a security, is an attempt to fundamentally expand its own power, as clearly stated by the significant question doctrine. If an agency wants to make decisions on significant issues, it must have explicit congressional authorization.
Judgment Details
Judge Katherine Polk Failla rejected most of Coinbase's motion, finding that the regulatory agency made "plausible" allegations against the exchange. She set April 19 as the final deadline for both parties to agree on a schedule for the case. While the judge indicated that the SEC seemed to have a basis to believe that certain tokens listed on the Wallet may meet the "investment contract" standard, she found that Coinbase did not appear to act as a broker, thus dismissing this part of the lawsuit. She ruled that other aspects of the lawsuit can proceed and dismissed claims of the SEC violating the significant question doctrine or administrative procedure law.
Paul Grewal, Chief Legal Officer of Coinbase, commented on this: Early motions against government agencies like ours are almost always denied. As we continue through this process and any necessary appeals, we encourage Congress to continue advancing comprehensive digital asset legislation in the United States. This is critical if innovation is to stay in the United States. We also appreciate the court's understanding that Coinbase's technological innovations, including the Wallet, do not and cannot implicate U.S. securities laws.
Future Outlook
The case is currently in the trial phase, and the final judgment is still uncertain, with various opinions on the direction of the case. Former U.S. federal prosecutor and partner at Cahill Gordon & Reindel LLP, 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 is very low. Enzer stated that the current issue facing the court is whether, assuming the SEC's position is established, there is enough evidence to present viable claims and proceed with discovery.
JW Verret, former advisory committee member of the SEC, expressed after the 2023 XRP case victory that the court's ruling on the XRP case would greatly increase Coinbase's chances of winning in its court battle 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. He believed that Coinbase's definition of "investment contract" is more precise than what the SEC provided, which could be a turning point in the case. He also mentioned that the ruling in the Ripple v. SEC case could have a positive impact on Coinbase's lawsuit.
Fox reporter Eleanor Terrett believes that there won't be a clear "victory" until the case reaches a conclusion. However, in this ruling, both sides have had some success. The SEC successfully convinced Judge Failla that it has a reasonable basis for most of its allegations against Coinbase. However, Coinbase may also persuade her during the discovery process. It is good news for all parties that Judge Failla actually has a deep understanding of crypto assets/Web3 and realizes the importance of the outcome of her case.
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