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Coinbase Challenges SEC’s Broad Definition of Securities in New Court Filing

Hassan Shittu
Last updated: | 4 min read
Source: AdobeStock / Rafael Henrique

Coinbase’s submission of a “final petition” to the court in its ongoing legal battle with the US Securities and Exchange Commission (SEC) argues tokens don’t necessarily represent the definition of an investment contract and that the SEC has overstepped its regulatory bounds.

In an October 24 filing in the Southern District of New York, the company articulated its position in a legal brief addressed to Judge Katherine Polk Failla of the Southern District of New York. This action came as a response to the regulator’s assertions, which were detailed in a 40-page rebuttal filed earlier this month, as disclosed in a court filing.

Coinbase strongly criticized the SEC and argued that the SEC’s broad definition of what constitutes a security was unwarranted. The exchange asserted that the SEC was attempting to assert jurisdiction “over essentially all investment activity,” a power that, according to Coinbase, only Congress is constitutionally entitled to exercise, as established under the major questions doctrine.

Coinbase contested that the cryptocurrency lists should not fall under the purview of the regulator. In the final plea, the US crypto exchange stated on Tuesday to a federal judge seeking to dismiss the lawsuit, which was filed against it in June.

The filing seeks Judge Failla’s dismissal of the SEC’s case at an early stage. A motion for judgment on the pleadings requests that the court evaluate whether a legal ruling can be made based on the assumption that all the facts presented in the SEC’s complaint are accurate.

Coinbase Awaits Judge Failla’s Decision as SEC Case Progresses, With a Potential Trial Date in 2025

Judge Failla has the option to request Coinbase and the SEC present oral arguments in court. Subsequently, she can make a judgment on the case, opt for its dismissal, or decide to proceed with a jury trial.

Suppose Judge Failla isn’t swayed to dismiss the case. In that case, Coinbase is eager to expedite the proceedings and head to trial as swiftly as possible, as indicated by an individual familiar with the matter. They also mentioned that the discovery phase, where both sides exchange evidence, could extend for up to a year, potentially pushing a trial date to at least the first quarter of 2025.

However, Judge Failla has been actively involved in crypto-related cases this year, issuing rulings favoring entities like DeFi giants Uniswap and Ripple. She notably delved into the workings of DeFi exchanges that employ liquidity pools earlier this year and found in July that Ripple (XRP) “is not necessarily a security on its face.”

In an October 24 X post, Coinbase chief legal officer Paul Grewal responded to the SEC’s opposition to their motion for judgment, asserting their authority over all investments and suggesting that the terms “security” and “contract” in the statutes have no limiting function. He counters these claims, saying the SEC’s definitions have “no limiting function at all” and that this interpretation has never been the law, nor is it the current law.

SEC Presses On in Lawsuit Against Coinbase Over Alleged Securities Violations

Coinbase’s latest filing is a response to the SEC’s October 3 rebuttal, in which the SEC urged the court to deny Coinbase’s motion to dismiss. The SEC first sued Coinbase, along with Binance, in early June, claiming the exchange violated US securities laws by listing several tokens it considers securities and not registering with the regulator.

The SEC has made several allegations against Coinbase, including the facilitation of trading in unregistered securities, which led to the operation of an unregistered exchange, broker, and clearinghouse. In its complaint, the securities regulator identified 13 tokens as securities, including Solana’s (SOL) token and Cardano’s (ADA) coin.

Additionally, the SEC has accused Coinbase of offering and selling unregistered securities through its staking program. This program allows investors to stake five different tokens, all of which the SEC contends are in the category of investment contracts.

In August, Coinbase made a significant move by seeking to have the lawsuit dismissed. Their rationale at the time was the hope that this legal action would compel US regulators to establish clear and understandable rules and guidelines that everyone in the industry could adhere to.

Coinbase formally submitted a court motion in August, urging Judge Failla to dismiss the case. They contended that the SEC had “violated due process, abused its discretion, and deviated from its previous interpretations of securities laws.”

In response to this, the SEC, in its opposition filing on October 3, accused Coinbase of trying to divert attention from the critical shortcomings in its legal arguments by placing the blame on the SEC for its current legal predicament.

However, the SEC maintained its stance that several cryptocurrencies listed by Coinbase were indeed investment contracts under the Howey test. The SEC leans on the Howey Test, contending that certain tokens qualify as securities due to meeting the criteria of “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”