Coinbase loses first round of battle against SEC

Court has ruled against Coinbase motion for dismissal of charges of operating as an exchange, broker and clearing agency.
Court has sided with SEC on staking program issue but supports Coinbase on SEC claims regarding wallet.
Case will proceed as US District Judge Katherine Polk Failla mostly denied Coinbase’s motion to dismiss the SEC’s charges.

In June of 2023, the US Securities & Exchange Commission (SEC) levied charges against Coinbase Exchange, claiming that the trading platform operates as an unregistered securities exchange. It was around the same time as when the financial regulator went after Binance Exchange. Both platforms denied the charges.

Also Read: US SEC sues Coinbase a day after move against Binance

Coinbase versus SEC case to proceed as court sides with regulator

A day after the SEC filed a lawsuit against Binance last year, it went after Coinbase in a sign that the clampdown is extending to key players in the industry. The latest development in the matter is that the court has ruled in favor of the financial regulator, which means the case will continue.

Today, the Court decided that our SEC case will move forward on most of the claims, but dismissed the claims against Coinbase Wallet. We were prepared for this, and we look forward to uncovering more about the SEC’s internal views and discussions on crypto regulation. 1/6
— paulgrewal.eth (@iampaulgrewal) March 27, 2024

In an 84-page decision on Wednesday, US District Judge Katherine Polk Failla leaned in favor of the SEC, when she largely denied the motion to dismiss the regulator’s earlier request to dismiss the SEC’s charges. In its request to dismiss, Coinbase charged:

SEC violated Coinbase's right to due process by not providing the industry with fair notice that crypto assets traded on digital platforms could be considered securities.
Invoking the major questions doctrine, a guiding principle established by the Supreme Court. It stipulates that Congress should not delegate to agencies like the SEC on matters of major political or economic significance.

However, Judge Polk argued that the SEC had provided proper notice through written guidance, litigation and other actions. An excerpt from the judge’s ruling reads:

Having now carefully considered the parties' arguments ... the Court concludes that because the well-pleaded allegations of the Complaint plausibly support the SEC's claim that Coinbase operated as an unregistered intermediary of securities, Defendants' motion must be denied in large part.

Nevertheless, Coinbase took some wins home, including that the case against one product, Coinbase Wallet, could be dismissed. This determination came as the platform did not mention the wallet as a source of revenue in its most recent shareholder letter.

While the judge’s decision is a big blow to Coinbase, the outcome, as alluded to by Judge Failla, exposes a notable split among lower courts on how judges should treat crypto assets. Coinbase and the SEC have until April 19 to submit a case management plan, detailing the key issues that are in the case and how they intend to pursue these issues at trial.

Key takeaways from the Judge Polk's address are:

The SEC's claim that Coinbase Wallet is an unregistered broker has been rejected.
Coinbase staking program shutdown rejected
Coinbase operates as an exchange, as a broker, and as a clearing agency under the federal securities laws and, through its staking program,
Coinbase engages in the unregistered offer and sale of securities
The SEC may continue to sue Coinbase exchange

Bitcoin price slipped below $69,000 following the announcement that the Judge had given the SEC a green light to pursue lawsuit against Coinbase.

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