Coinbase must face US securities regulator's lawsuit, judge says


FILE PHOTO: A smartphone with displayed Coinbase logo and representation of cryptocurrencies are placed on a keyboard in this illustration taken, June 8, 2023. REUTERS/Dado Ruvic/Illustration//File Photo

(Reuters) -A federal judge in Manhattan on Wednesday said the U.S. Securities and Exchange Commission's lawsuit against Coinbase can move forward, but dismissed one claim the regulator made against the largest U.S. cryptocurrency exchange. U.S. District Judge Katherine Polk Failla partly granted Coinbase's motion to dismiss the SEC's lawsuit which alleges the company is flouting its rules.

While the decision is a partial win for Coinbase in what could be a lengthy and expensive court battle, it largely blesses the SEC's approach to cryptocurrency and agrees with other judges who have sided with the regulator.

Shares in Coinbase were down about 1.5% in early afternoon trading.

Coinbase Chief Legal Officer Paul Grewal said in a social media post on X that the exchange was prepared for the ruling and would continue to fight the SEC's claims.

"We remain confident in our legal arguments, we look forward to proving we’re right," he said.

A spokesperson for the SEC said the agency was "pleased that yet another court has confirmed that, while the term 'crypto' may be relatively new, the framework that courts have used to identify securities for nearly 80 years still applies."

"We will continue to protect investors against risks in the crypto markets when, as here, the securities laws are implicated," the spokesperson said.

HIGH-WATER MARK

The SEC sued Coinbase in June, saying the firm facilitated trading of at least 13 crypto tokens that should have been registered as securities and was operating illegally as a national securities exchange, broker and clearing agency without registering with the regulator.

Failla allowed most of the lawsuit to proceed, but dismissed the SEC's claim that Coinbase acted as an unregistered broker via its wallet application.

The case against the world's largest publicly-traded cryptocurrency exchange is a high-water mark in the regulator's campaign to apply U.S. securities law to the digital asset companies.

To do so, the SEC has largely relied on a U.S. Supreme Court ruling that set out a test for when an investment constitutes a security. A key piece is whether returns "come solely from the efforts of others."

Coinbase has argued that crypto assets, unlike stocks and bonds, do not meet that definition, a position held by the vast majority of the crypto industry.

Failla rejected that argument, saying the SEC has a plausible claim that at least some of the digital assets listed on the exchange are securities.

The SEC has pointed to statements by developers, including Solana Labs, about efforts to build and improve their technology.

"An objective investor in both the primary and secondary markets would perceive these statements as promising the possibility of profits solely derived from the efforts of others," Failla wrote.

In the few cases that have gone to court, judges have mostly agreed with the SEC that the crypto assets at issue were securities.

Unlike assets such as commodities that are strictly regulated, securities must be registered with the SEC by their issuer. They also require detailed disclosures to inform investors of potential risks.

(Reporting by Hannah Lang in Washington and Jody Godoy in New YorkEditing by Matthew Lewis, Nick Zieminski and Paul Simao)

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