Coinbase Challenges the SEC: Seeks Case Dismissal, Defending Its Practices

Coinbase has sent waves throughout Web3 by taking a stand against the recent lawsuit filed by the U.S. Securities and Exchange Commission (SEC). In a response submitted on June 28, the exchange giant contends that the case lacks a solid legal foundation and should be dismissed. The action comes amidst ongoing tension between the digital asset industry and the top U.S. securities regulator.

Where SEC vs. Coinbase stands

The SEC’s suit, lodged in early June shortly after a similar suit against Binance, accused Coinbase of operating as an unregistered securities exchange, citing over a dozen tokens on the platform as unregistered securities, including notable coins such as ADA and SOL. The regulator’s complaint claims Coinbase violated securities law, a charge the company refutes, and seeks to argue in court.

Paul Grewal, Chief Legal Officer at Coinbase, has been significantly outspoken about legal proceedings thus far. Taking to Twitter, he has continuously reinforced that his company does not list securities and has been consistent in its practices since the SEC conducted a thorough review of its operations before its public debut in April 2021. 

He expressed that Coinbase’s business model has not fundamentally changed since the IPO, and the same procedures for listing tokens have been followed.

Coinbase’s response

In the legal response, Coinbase argues that the cryptocurrencies on its platform do not classify as securities since they are not part of an investment contract – a crucial criterion for a digital asset to be deemed a security. Moreover, the exchange stated that the issuers of the tokens listed on its platform owe no obligations to investors, which further substantiates its claim that these transactions do not fall under securities transactions.

The company also underlines the SEC’s endorsement of its public listing in April 2021 as evidence of the regulator’s prior acceptance of its business operations.

Coinbase has requested that the court allow a motion for judgment, proposing a seven-week schedule for its motion, the SEC’s opposition, and its response. Grewal indicated on Twitter that the exchange plans to file this motion to dismiss the case, stating that the SEC’s allegations far exceed existing law.

Coinbase maintains that the SEC has not provided sufficient clarity on how existing securities laws apply to digital assets, leading to confusion and misinterpretation within the crypto industry. A sentiment echoed by Binance, which recently accused the SEC of deliberately misleading the public through statements it made surrounding a different lawsuit.

On the other end of the spectrum, though, the SEC, led by Chair Gary Gensler, asserts that many digital assets are indeed securities and that crypto firms are contravening its rules by failing to register. Gensler has also warned of the risks to investors as crypto firms often combine roles, such as custody and exchange services, traditionally handled by separate regulated entities.

It’s uncertain whether or not Coinbase’s clash with the SEC may potentially develop into a protracted legal battle, considering precedents such as the SEC’s ongoing three-year court dispute with Ripple Labs. Undoubtedly, though, the outcome could shape the future regulatory landscape for digital assets for the foreseeable future.