Coinbase Seeks Dismissal of SEC’s Lawsuit in Federal Court

Coinbase, the world’s second-largest crypto exchange by trading volume, has asked a federal judge to dismiss the Securities and Exchange Commission’s (SEC) litigation against it.

The SEC sued Coinbase, the largest publicly-traded crypto exchange in the world, on June 6. The regulator accused the firm of operating as an unregistered broker since 2019. It also claimed that Coinbase merged three functions that are typically separated in traditional securities markets: broker, exchange, and clearing agency. 

Coinbase Argues It Does Not Offer “Investment Contracts”

At the crux of the SEC’s argument is that the crypto assets that Coinbase sold had the “characteristics of securities.” 

In a Manhattan court filing, Coinbase asserted that the SEC lacks authority for the lawsuit as the disputed assets are not securities. One of the key characteristics of a security, under the Howey Test, is that it involves an “investment contract.” Coinbase argues it does not meet that requirement, and that it “falls outside the agency’s delegated authority.”

“Our core argument is simple – we do not offer ‘investment contracts’ as that term has been construed by decades of Supreme Court and other binding precedent,” Coinbase Chief Legal Officer Paul Grewal said in a post on X, formerly Twitter.

An Argument Over What Is and What Isn’t a Security

Coinbase is taking a similar legal approach as other industry players, including Ripple. On July 13, Judge Analisa Torres of the Southern District of New York ruled that XRP, Ripple’s cryptocurrency, was not a security when sold on exchanges.

Now, Coinbase is hoping that a similar logic applied to its own case will win the day.

However, in the case of Ripple, the judge did rule that XRP was a security when sold to institutional investors. The XRP decision is also only related to one cryptocurrency. The case with Coinbase, a cryptocurrency exchange, is arguably far more complex. 

Despite the partial loss, Gary Gensler, the chair of the SEC, has indicated that he will not change strategy. His agency is still pursuing similar cases against Binance, Tron founder Justin Sun, and other industry players.

Gensler has ratcheted up the rhetoric in recent weeks. On July 17, Gensler told a National Press Club event that he would continue “to bring firms that may not be in compliance into compliance.”