Court largely rules against Coinbase’s dismissal efforts in SEC case

Judge Failla found that Coinbase didn’t operate as an unregistered broker in offering its wallet service

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The Securities and Exchange Commission and crypto exchange Coinbase each scored partial wins in a Wednesday morning court ruling amid their ongoing legal fight.

Judge Katherine Polk Failla denied most of Coinbase’s efforts to dismiss the SEC’s lawsuit. Specifically, Failla said that the SEC “sufficiently pleaded” that Coinbase operates as a clearing agency, broker and exchange under the federal laws. 

The court also found that the exchange’s staking program “engages in the unregistered offer and sale of securities.”

“The Court further finds that the SEC has sufficiently pleaded control person liability for CGI under the Exchange Act,” the filing Wednesday said.

However, Coinbase notched a win in its motion. The court granted Coinbase’s claims about its wallet service. The SEC previously argued that Coinbase acts as an unregistered broker when offering its wallet service. 

“The factual allegations concerning Wallet are insufficient to support the plausible inference that Coinbase ‘engaged in the business of effecting transactions in securities for the account of others’ through its Wallet application,” Failla wrote.

But, on the grounds of staking, Judge Failla said that the SEC “plausibly alleged” that Coinbase violated parts of the Securities Act by not registering with the SEC for the program. She further added that this is due to staking customers having a reasonable expectation of profit due to “Coinbase’s managerial efforts,” which falls under Howey.

Transactions made with crypto on a secondary market are not “categorically excluded” from being investment contracts, Failla said in her opinion. 

“An investor selecting an investment opportunity in either setting is attracted by the promises and offers made by issuers to the investing public,” she wrote.

The court also ruled that the SEC’s enforcement action doesn’t fall under the major questions doctrine, an argument Coinbase previously made. 

“Perhaps more importantly, the SEC is asserting neither a ‘transformative expansion in its regulatory authority,’ nor a ‘highly consequential power beyond what Congress could reasonably be understood to have granted’ it,” Failla wrote.

Failla ordered both sides to prepare a proposed case management plan next month ahead of an expected trial. 

Coinbase’s chief legal officer Paul Grewal said that the team “were prepared” for the denial in a post on X. 

“Looking ahead, we remain confident in our legal arguments, we look forward to proving we’re right, we are eager for the opportunity to take discovery from the SEC for the first time, and we appreciate the Court’s continued consideration of our case,” he added.

“We’re pleased that yet another court has confirmed that, while the term ‘crypto’ may be relatively new, the framework that courts have used to identify securities for nearly 80 years still applies. It’s the economic realities of a transaction, not the labels, that determine whether a particular offering constitutes a security,” an SEC spokesperson told Blockworks. 

Updated March 27, 2024 at 1:40 pm ET: Added comment from the SEC.

Updated March 27, 2024 at 12:09 pm ET: Added comment from Coinbase.


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