Coinbase Hunts Dismissal of “Neither Prudent nor Lawful” SEC Lawsuit

Coinbase has raised questions about the SEC’s authority and classification of digital assets.

Brian Armstrong standing on the law hammer.
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  • The SEC set the stage for a legal battle with Coinbase earlier this month.
  • The case has taken a new turn.
  • Coinbase has raised questions about the SEC’s authority and classification of digital assets.

The rampage of crypto enforcement lawsuits from the United States Securities and Exchange Commission has taken a new turn in the case against Coinbase as the crypto exchange has revealed its intent to seek dismissal of the case.

The SEC had accused the crypto exchange of running an unregistered securities exchange, broker, and clearing agency, labeling several of its listed assets as unregistered securities. The agency also asserted that a cross-section of Coinbase’s services, including its staking service, violated securities laws.

Coinbase Moves to Dismiss SEC Case

In new court documents dated Wednesday, June 28, Coinbase issued its response to the SEC’s complaint and revealed its intent to file for dismissal.

The crypto exchange argued that the regulator had approved its initial public offering in 2021 without ever mentioning that it had to register its business. 

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"The SEC's about-face is not a product of material changes to Coinbase's business since 2021; none are alleged. Nor is it due to new information. Nowhere in its Complaint does the SEC suggest that Coinbase hid anything in the many years of cooperative discussion that preceded it becoming a public company. Nor is the reversal a product of legislative change," Coinbase attorneys added, calling into question the motivation and fairness of the lawsuit.

Coinbase supported these arguments by pointing out that SEC Chair Gary Gensler had testified around the same time that the agency lacked the statutory authority to regulate crypto exchanges, adding that Congress alone could fill the regulatory gap. 

The exchange notably also took issue with the SEC’s classification of listed assets as securities.

Coinbase Denies Listed Assets, and Staking Services Are Securities

Contrary to the SEC’s complaint, the crypto exchange maintained that neither its listed assets nor staking service satisfy the Howey definition of an investment contract contending that there was no “enforceable obligation” on the firm or token issuers to generate profits for investors. 

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Coinbase further highlighted that efforts to clarify the SEC’s newly expanded definition of an investment contract had been stalled, citing its pending July 2022 petition for rulemaking and its writ of mandamus case to force a reply to the petition.

The firm raised the major questions doctrine, noting that even if the SEC’s stretching of Howey was justifiable, in cases affecting a significant portion of the economy and lacking clear Congressional statutes, the court yielded deference to Congress and not the agency’s definition.

"Even if the SEC had the requisite statutory authority, an agency's new interpretation of 'investment contract' would require formal rulemaking by that agency. Announcing that purported regulatory authority by means of punitive enforcement actions, rather than by notice-and-comment rulemaking, is a violation of due process and an abuse of the agency's discretion that independently warrants rejection of the claims asserted," Coinbase lawyers added.

The firm bashed the SEC’s regulation approach by enforcement as “neither prudent nor lawful.”

Coinbase has asked for leave to file its motion to dismiss within seven days of the court’s approval.

On the Flipside

  • Like Coinbase, Binance has also revealed its intent to file for a dismissal of its case with the SEC.
  • Coinbase is asking the court to force the SEC to respond to its petition for rulemaking in a separate lawsuit.
  • Coinbase Chief Executive Officer Brian Armstrong has asserted that the exchange is willing to fight the SEC case up to the supreme court.

Why This Matters

Coinbase’s immediate push for a dismissal indicates that the exchange feels confident going into the SEC case, and their filing further underscores the lack of clarity over the commission’s classification of digital assets.

Read this to learn more about the SEC’s complaint against Coinbase:

SEC Condemns Coinbase Operating Structure in Lawsuit Spree

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This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

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Okoya David

David Okoya is a crypto news reporter at DailyCoin based in Nigeria. He covers various topics related to the cryptocurrency industry, including exchanges, regulations, and price movements, and strives to bring fresh angles to breaking news. With experience as a freelance crypto news writer, David upholds the highest journalistic standards, telling complete stories and answering lingering questions whenever possible.