SEC: Coinbase Before Lawsuit ‘Understood’ Securities Law Could Apply To Its Business

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SEC: Coinbase before Lawsuit ‘Understood’ Securities Law Could Apply to Its Business PlatoBlockchain Data Intelligence. Vertical Search. Ai.

The US Securities and
Exchange Commission (SEC) yesterday (Friday) filed its response to Coinbase’s rejection of its allegations, noting that the cryptocurrency exchange “understood that
the securities laws could apply to its conduct.” The securities watchdog added
that Coinbase “knew which rules to consider in evaluating the legality of its
conduct” but decided to take the risk “in the name of growing its business.”

In early June, the SEC dragged Coinbase to court, claiming that the leading crypto exchange in the United
States, is operating an unauthorized trading platform on which it offered 12
crypto tokens that are unregistered securities. It further alleged that
Coinbase runs an illegal crypto-staking service.

Responding to SEC’s
lawsuit last month, Coinbase said SEC’s allegations “lack all merit,” adding that the
regulator had no legal power to supervise its business. Digital assets listed
on Coinbase are not ‘securities’ but ‘just an asset sale,’ the exchange contended, citing the Howey Test. The test is a legal doctrine used to decide
if a transaction passes as an investment contract, which is a type of security.

However, countering
Coinbase, SEC claimed that the exchange deployed the ‘legal framework’ of the
test “as a basis for making listing decisions that it now claims has no
applicability to its activities.” The regulator further alleged that Coinbase
‘explicitly discouraged’ digital assets issuers to avoid ‘problematic
statements’ that are ‘traditionally associated with securities’ in their
marketing materials.

Coinbase previously
pointed to the SEC’s authorization of its public debut on Nasdaq in April 2021 as evidence that it was not engaging in
unregistered securities. However, the watchdog in the response also countered
this.

“Since becoming a
public company, Coinbase has repeatedly informed its shareholders of the risk
that the crypto assets traded on its platform could be deemed securities and
therefore that its conduct could violate the federal securities laws—including
in the very registration statement it now points to as proof that the SEC
supposedly blessed its conduct,” SEC explained.

Is SEC Acting outside Its Jurisdiction?

Meanwhile, Coinbase
in its legal response to SEC argued that even if the Commission had the power
to regulate its cryptocurrency exchange business, the watchdog’s lawsuit still
violates its ‘due process rights’ and this constitutes ‘an extraordinary abuse of process’.
The exchange said the ‘major questions doctrine’ should also be applied in such
a situation, which means that the SEC will need new legal backing from the US
Congress to regulate digital assets as securities.

Responding, SEC picked holes in the argument, noting that the crypto exchange
‘misapprehends the purpose and reach’ of the doctrine. The regulator believes
that the doctrine is rooted in the ‘separation of powers concerns’.

“This case, by
contrast, involves the SEC’s exercise of its longstanding authority to enforce
statutory requirements,” the regulator said. “In 1934, Congress authorized the
SEC to enforce the federal securities laws through civil law enforcement
actions.”

In addition, SEC noted
that should the court approve Coinbase’s request to apply for an order that
strikes out its claims, it will file a countermotion. Meanwhile, Finance Magnates reported that the US District Court in New York has fixed July 13, 2023, as the approved date to hear the
case between both parties.