Coinbase is asking a judge to end the U.S. Securities and Exchange Commission’s frivolous lawsuit accusing the world’s largest publicly traded cryptocurrency exchange of violating federal securities laws. In a filing in federal court in Manhattan, Coinbase said the SEC had no authority to pursue its lawsuit because the digital assets and services it objected to did not qualify as securities. The company also accused the agency of overreach.
The SEC in June filed suit in the Southern District of New York, accusing Coinbase of violating the registration provisions of the Securities Exchange Act and the securities offering registration provisions of the Securities Act. The suit seeks injunctive relief, disgorgement of ill-gotten gains, plus interest and penalties against the company. The regulator says the company should have disclosed that its product manager, Ishan Agarwal, shared material nonpublic information about upcoming cryptocurrency asset listings on its platform with his brother and a friend.
In its filing, Coinbase said the SEC’s lawsuit was an attempt to impose regulations on the industry by “selectively targeting crypto platforms that have raised money from investors.” In addition, the company argued that the SEC’s case rested on two legal theories: that the exchange is an unregistered national securities exchange and that it acts as a broker-dealer and clearinghouse without having registered for either role with the SEC.
Coinbase’s request for the court to toss the SEC’s lawsuit is notable, PYMNTS notes, as it could offer a glimpse into the legal machinations behind the regulatory tug-of-war over the crypto sector. It could provide some clarity as the White House and Congress grapple with how to regulate the burgeoning industry.
While the SEC has a long history of enforcing securities law, it has a spotty record regulating the fast-changing crypto space. Critics say the agency needs to keep pace with innovation, despite assurances from its leadership that it would.
Regardless of whether the judge in this case sides with Coinbase, it will likely be only the first of many court cases that will test the boundaries of SEC jurisdiction over the digital-asset market. As Congress and the White House push to create a legislative framework to govern crypto, it may be time for the SEC to step up its game.
The SEC’s stance on the market could have far-reaching consequences for the entire ecosystem. If the agency prevails, it would mean that all cryptocurrency offerings must undergo a lengthy and expensive SEC review before they can launch. It would also give the SEC new powers to impose civil penalties against alleged market participants.
A judge has scheduled a July 13 hearing for the case between the SEC and Coinbase. In its 177-page answer to the SEC’s complaint, Coinbase argues that the regulator relies on outdated legal precedent in its case against the exchange.
The legal battle will be a crucial test of the SEC’s assertion that digital tokens are securities and that it has the right to regulate them as such. A decision favoring the SEC would set a dangerous precedent that could stifle the innovative crypto market.
