In a sudden move, Coinbase has filed a response in the ongoing case with the United States Securities and Exchange Commission (SEC). The exchange in its very first response in the case claims that digital assets listed on its platform fall outside the SEC’s purview.
The SEC versus Coinbase feud has been filled with various advancements. The regulatory war began when the SEC filed several charges against Coinbase on June 6th. The lawsuit had multiple allegations including that a dozen of the cryptocurrencies offered through its wallet or trading platforms were unregistered securities.
On early Thursday morning, Coinbase claimed that these cryptocurrencies are not investment contracts and therefore are not securities. In its lawsuit, the SEC accused the firm of trading at least 13 crypto assets that are securities and were not registered. The SEC stated that these assets should have been registered with regulators before they were issued.
Notably, the argument from Coinbase isn’t out of the blue and hails from prior public statements like tweets and blog posts, but Thursday’s filing goes into further detail explaining the company’s position. The current argument states that cryptocurrencies on the exchange’s secondary market platform are not part of any arrangements where a promoter is selling an asset tied to a contract.
Using this case, the company tried spelling out the Supreme Court’s Howey case as an example. The filing said that the issuers of the tokens owe no obligations to investors.
Because no such obligations are carried in the transactions over Coinbase’s secondary market exchange, and because the value that Coinbase purchasers receive through these transactions inheres in the things bought and traded rather than in the businesses that generated them, the transactions are not securities transactions.
Some of the filing continues to reiterate Coinbase’s already-live public statements, arguing that current SEC Chair Gary Gensler changed his position on the regulator’s authority over crypto between taking office in April 2021 and mid-2022; saying the company has asked for regulation; and noting that Congress has started looking at the issue of crypto regulation.
Even were the SEC correct that the assets and services it identifies are within the scope of its existing regulatory authority, this action must be dismissed on the independent grounds that it violates Coinbase’s due process rights and constitutes an extraordinary abuse of process.
Further, the filling claimed that “the SEC has chosen” to pursue enforcement actions over rulemaking. It explained that Coinbase has been complying to the federal rules for long and has requested SEC for guidance and clarity regarding regulation. It stated:
For years, Coinbase has voluntarily submitted to regulation by multiple overlapping regulatory bodies, has adhered to the public and limited formal guidance from the SEC, senior SEC Staff, and the courts about the application of securities law to its industry, and has begged the SEC for guidance about how it thinks the federal securities laws map onto the digital asset industry as the SEC’s actions reflected an escalating but undisclosed change in its own view of its authority.
The rest of the filing contains a point-by-point answer to the SEC’s lawsuit. In a separate document filed to the judge overseeing the case, Coinbase alleged that its due process rights were violated when the SEC brought the lawsuit and that the SEC’s lawsuit may violate the “major questions” doctrine. The company asked the judge to let it file for judgement and set a 7-week schedule for its motion, the SEC’s opposition and its own response to the opposition.
Notably, Coinbase’s lawsuit came months after the Wells Notice from March, which hinted at such an enforcement action. Since that notice, the exchange has been in a constant argument with the regulator targeting its enforcement oriented approach.
After Wells Notice, the exchange retaliated with narrow legal action. Upon Coinbase’s petition, the US Court of Appeals for the Third Circuit responded to the complaint against the SEC regarding the need for clear rules for trading digital assets. However, despite this the SEC chief stayed firm on his stance and denied the exchange’s request saying it has no right to request clarity.
Coinbase has shown optimism and courage in the wake of the recent lawsuit and the CEO in the interview said that any clarity from the courts, irrespective of the outcome, will be a “step in the right direction.” It also said that it places its trust in the US court in case of no engagement from the Congress.