Coinbase is caught in a litigation whirlpool: background of the case, details of the judgment and future direction

On March 27, Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York dismissed most of Coinbase’s motions, holding that Coinbase, as an unregistered exchange, broker and clearing agency, was incompatible with An institution under the federal securities laws and engages in the unregistered offering and sale of securities through its pledge program. However, the court rejected the SEC’s claim that Coinbase was acting as an unregistered broker by making its wallet app available to customers.

Original text of the judgment:

https://plum-harrietta-82.tiiny.site/

References:

https://www. coindesk.com/policy/2024/03/27/coinbase-loses-most-of-motion-to-dismiss-sec-lawsuit/?utm_medium=referral&utm_source=rss&utm_campaign=headlines

Case Background

SEC filed a lawsuit against Coinbase on June 6, 2023, accusing it of violating federal securities laws by providing trading and staking services to the public. It also believes that Coinbase Wallet acted as an unregistered brokerage firm. Require Coinbase to return illegal profits and pay corresponding pre-judgment compensation information, impose civil penalties on Coinbase, and grant any compensation measures that may be appropriate to protect the interests of investors.

On June 29, 2023, Coinbase stated in response to the SEC’s lawsuit that the cryptocurrencies listed by the SEC were not investment contracts and therefore were not securities and did not fall within the scope of its supervision. Coinbase also said that its due process rights were violated when the SEC filed the lawsuit and that the SEC's lawsuit may have violated the "material issues" doctrine.

On August 4, 2023, Coinbase submitted documents to formally respond to the SEC’s lawsuit, alleging that the regulatory agency went far beyond its jurisdiction. Coinbase countered in the filing that the SEC did not claim the examples involved investment contracts or contracts for the future value of assets. Transactions on the Coinbase platform and Prime are not and do not involve the provision of contracts that reflect the future value of a business's revenue, profits, or assets. They are sales of goods and the obligations of both parties are completely released once the cryptographic tokens are delivered in exchange for payment.

On October 25, 2023, Coinbase filed a case response brief and stated in the document that because the SEC’s complaint did not and could not argue that the simple asset transactions it determined involved ongoing contractual obligations related to the enterprise, it Coinbase reserves the right to make a judgment on the complaint. The SEC's view that any purchase by a buyer seeking to obtain increased value constitutes an investment contract, and therefore a security, is an attempt to fundamentally expand its own powers and, as the material issues doctrine makes clear, is material if an institution wants to Decisions on issues must be supported by clear authorization from Congress.

Details of the decision

Judge Katherine Polk Failla denied most of Coinbase’s motions, finding that the regulator had brought “reasonable” charges against the exchange. She set an April 19 deadline for both sides to agree on a plan to organize the case. While the judge said the SEC appeared to have reason to believe that certain tokens listed on Wallet might qualify as an "investment contract," Coinbase did not appear to be acting as a brokerage and dismissed that portion of the lawsuit. She ruled that other aspects of the lawsuit could proceed, rejecting claims that the SEC violated the material issues doctrine or the Administrative Procedure Act.

Coinbase Chief Legal Officer Paul Grewal said: Early-stage motions like ours against government agencies are almost always denied. We encourage the U.S. Congress to continue advancing comprehensive U.S. digital asset legislation as it continues this process and any necessary appeals. This is critical if innovation is to stay in the United States. We also appreciate the court’s understanding that technological innovations such as the Coinbase Wallet do not and cannot implicate U.S. securities laws.

Future Direction

The case is currently in the trial stage, and the final verdict is still uncertain, and there are different opinions on the direction of the case. Former U.S. federal prosecutor and Cahill Gordon & Reindel LLP partner Samson Enzer predicted on January 27 that the judge would not dismiss the SEC v. Coinbase case at this stage because the threshold for the SEC to bring charges sufficient to obtain evidence disclosure is very high. Low. Enzer said the question for the court now is whether there is enough evidence to make a viable claim and then proceed with discovery, assuming the SEC's position holds.

JW Verret, a former SEC advisory committee member, said after winning the XRP case in 2023 that the court’s decision in the XRP case will greatly improve Coinbase’s chances of winning in court proceedings against the SEC. Elliott Stein, a senior litigation analyst at Bloomberg, predicted in January that Coinbase would win in its lawsuit against the SEC. He believed that Coinbase’s definition of “investment contract” is more precise than that provided by the SEC, which may 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 there won't be a clear "victory" here until the case is concluded. But in this ruling, there was a victory for both sides. The SEC successfully convinced Judge Failla that it had a reasonable basis for most of Coinbase’s claims. But equally, Coinbase may have convinced her during the discovery process. Failla also agreed with Coinbase’s claims regarding the wallet. The good news for all parties involved is that Judge Failla actually knows a lot about cryptoassets/Web3 and realizes the importance of the outcome of her case.

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