Coinbase asks for dismissal of SEC lawsuit, says tokens are not investment contracts

Coinbase, a U.S. crypto exchange, has filed papers asking the New York federal court to dismiss its lawsuit from the Securities and Exchange Commission(SEC). While the SEC accused the exchange of offering unregistered securities, Coinbase argues that the digital assets listed on its platform are not subject to the regulator’s jurisdiction in its 177-page response to the SEC lawsuit.

Coinbase says tokens are not investment contracts

In early June, the SEC filed a lawsuit against Coinbase, saying that a dozen cryptocurrencies offered through its trading or wallet services were unregistered securities. Early on Thursday, Coinbase submitted its response, asserting that these cryptocurrencies are not securities because they are not investment contracts.

Coinbase had previously made its defense on public statements on its blog posts and tweets, but today’s filing provides more specifics supporting its claim. The exchange explains that no agreements exist if a promoter sells an asset linked to a contract regarding cryptos on the exchange’s secondary market platform, essentially citing the Supreme Court’s Howey test as an example. Hence, the filing explained the token issuers have no obligations to the investors.

According to the exchange, any investment contract that may have existed concerning the tokens offered for sale on its platform did so earlier between the parties who created the tokens and those who purchased them. Coinbase’s top lawyer Paul Grewal highlights that over ninety per cent of all coins are not eligible for sale under the internal vetting procedure used by Coinbase.

The exchange also looked into the idea that a former senior SEC official advanced that tokens that were once securities may lose that classification as the decentralized nature of the blockchains hosting them increases.

SEC has offered inadequate guidance on cryptos 

Coinbase is relying on a so-called “fair notice defense” in its argument to have the case dismissed. This defense is founded on the constitutional principle that governments can only bring legal action if they have informed the public about the particular law. Notably, its argument that its tokens on the exchange are not securities has not been tested seriously by the U.S. courts, where crypto laws are still new and in development.

The filing also heavily references SEC Chairman Gary Gensler’s public statements. Between 2021 and mid-2022, his remarks hinted that he believed the agency lacked the legal jurisdiction to regulate cryptocurrencies, and they were based on the SEC’s statement that there was a “regulatory gap” in the industry.

Coinbase highlighted its voluntary submission to regulations to the multiple overlapping regulatory bodies and has followed the SEC, senior SEC staff and the court’s guidelines regarding securities laws application to its industry for years. The exchange noted that it has been asking for SEC guidance but has yet to obtain any. According to them, the agency has instead focused on enforcement action instead of rulemaking.

Coinbase claims that the SEC’s lawsuit may have breached the “major questions” doctrine and that its due process rights had been violated in a second document submitted to the judge supervising the case. The company requested a 7-week timeline from the judge for the filing of its motion, the SEC’s opposition, and its response to that opposition.

The Coinbase request for the case to be dismissed comes as the SEC continues to crack down on crypto. The regulator recently filed a lawsuit against Binance and its U.S. affiliate for allegedly mismanaging customers’ deposits and making false statements to the regulators. Binance later filed a request to curtail the SEC’s use of language regarding the exchange’s management of customer funds, which District Court Judge Amy Berman Jackson denied. Meanwhile, they have been given until September 21 to respond to the allegations.

From Zero to Web3 Pro: Your 90-Day Career Launch Plan