Coinbase loses round in legal fight with SEC as judge clears way for trial

Coinbase loses round in legal fight with SEC as judge clears way for trial
Chair Gary Gensler’s SEC has brought a slew of cases against crypto defendants, but Coinbase CEO Brian Armstrong has fought back.
  • Ruling in closely-watched case was expected.
  • Coinbase will now test the SEC's definition of digital assets as securities.
  • Judge throws out one count against Coinbase.

A federal judge on Tuesday denied Coinbase’s request to throw out a lawsuit brought against the listed exchange by the US markets watchdog.

The case will now proceed to trial.

In a win for the US Securities and Exchange Commission, Judge Katherine Polk Failla said Coinbase had engaged in the “unregistered offer and sale of securities.”

In her 84-page ruling, Failla did agree with Coinbase that it does not act as unregistered broker in offering its wallet application to customers, and dismissed that claim.

Stay ahead of the game with our weekly newsletters

Series of allegations

Coinbase’s shares were down 1.1% in late morning trading New York time.

In a move designed to push crypto firms to register digital assets the same as stocks and bonds, the SEC sued Coinbase in June alleging it violated securities laws.

The regulator said Coinbase combined the functions of a securities exchange, broker, and clearing agency — functions that are usually kept separate in traditional finance — and failed to register these operations with the SEC.

It also said Coinbase was facilitating the offer and sale of unregistered securities via its staking programme.

Join the community to get our latest stories and updates

Coinbase did not dispute the facts in the case.

However, the exchange said that as none of these tokens were securities, the SEC did not have a case against it and was overstepping its authority.

Coinbase’s argument is that crypto is a novel technology and asset class to which securities laws do not apply, and it needs its own tailored rules.

However, Failla sided with the SEC in her decision.

“At first blush, the addition of the prefix ‘crypto’ to a commonly understood word like ‘asset’ may suggest a paradigm shift… " she said.

But, she added, “the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly 80 years.”

Important precedent

The case is one of the most important in crypto’s history.

Armed with the assertion that the vast majority of crypto tokens are securities, chair Gary Gensler’s SEC has brought a slew of cases against crypto defendants, all alleging violations of securities laws.

The case against Coinbase specifically pits the powerful markets watchdog against the US’s biggest exchange.

True to his Silicon Valley roots, CEO Brian Armstrong has not taken the enforcement action lying down.

He has made this trial about the survival of crypto as a whole, and embarked on a public relations campaign to rally investors to his cause.

Nevertheless, Coinbase expected to lose this particular skirmish, Chief Legal Officer Paul Grewal told DL News recently.

“Judges generally don’t like to deprive any plaintiff of their full opportunity to prove their case — and that’s especially true when the US government is the plaintiff,” he said then.

“Our odds even before we get out of the gate are pretty low of getting this thing dismissed early.”

Updated with Coinbase’s stock price on March 27.

Reach out to the author at joanna@dlnews.com.