In what is shaping up to be a landmark legal battle, Coinbase, the world’s largest publicly traded cryptocurrency exchange, is set to confront the U.S. Securities and Exchange Commission (SEC) in federal court on Wednesday. The core of the dispute revolves around whether the tokens traded on Coinbase’s platform are securities, subject to the SEC’s regulatory authority.
According to insiders and court documents, Coinbase is poised to argue that the SEC’s case should be dismissed on the grounds that crypto assets, unlike traditional assets such as stocks or bonds, do not fall under the SEC’s jurisdiction. This argument challenges the SEC’s claim that Coinbase facilitated the trading of at least 13 crypto tokens that should have been registered as securities and accuses the regulatory body of overreaching.
The SEC sued Coinbase in June, alleging that the firm was operating illegally as a national securities exchange, broker, and clearing agency without proper registration. The lawsuit also targets Coinbase’s “staking” program, where the company pools assets to verify activity on blockchain networks, offering commissions and “rewards” to customers. The SEC contends that this program should have been registered with the agency.
This legal battle is a critical juncture for the digital assets sector, as its outcome could significantly clarify the SEC’s jurisdiction over cryptocurrencies. The SEC, under Chair Gary Gensler’s leadership, has expanded its focus from companies selling digital tokens to those offering trading platforms, clearing activity, and acting as broker-dealers.
Coinbase, in August, requested Judge Katherine Polk Failla to dismiss the SEC’s lawsuit. The exchange cited a separate case where a judge ruled in favor of Ripple Labs, finding that it did not violate federal securities law by selling its XRP crypto token on public exchanges. This ruling was seen as a significant win for the crypto sector.
However, the SEC argues for the continuation of its case against Coinbase, referencing a different court ruling in the case of crypto developer Terraform Labs that supported the regulator’s stance.
As the legal tussle unfolds, the crypto industry keenly watches, with the outcome potentially setting a precedent for how digital assets are regulated in the United States. Crypto companies generally deny that most tokens meet the definition of a security and advocate for specific legislation to regulate the industry. This case, therefore, not only impacts Coinbase but could also influence the broader landscape of cryptocurrency regulation.
