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| A smartphone with displayed Coinbase logo and depiction of bitcoins are placed on a keyboard in this image shot, June 8, 2023. |
March 27 (mod1s) - A federal court in Manhattan on Wednesday ruled the U.S. Securities and Exchange Commission's lawsuit against Coinbase (COIN.O), opens new tab may continue ahead, but rejected one allegation the agency made against the biggest U.S. cryptocurrency exchange.
U.S. District Judge Katherine Polk Failla partially approved Coinbase's petition to dismiss the SEC's case which argues the business is flouting its regulations.
While the ruling is a partial gain for Coinbase in what may be a protracted and costly legal fight, it mainly validates the SEC's approach to bitcoin and agrees with other courts who have agreed with the agency.
Shares of Coinbase were down approximately 1.5% in early afternoon trade.
Coinbase Chief Legal Officer Paul Grewal said in a social media post on X that the exchange was prepared for the verdict and will continue to fight the SEC's charges.
"We remain confident in our legal arguments, we look forward to proving we’re right," he added.
A representative 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 spokeswoman stated.
HIGH-WATER MARK
The SEC sued Coinbase in June, alleging the business enabled trading of at least 13 crypto tokens that should have been registered as securities and was functioning unlawfully as a national securities exchange, broker and clearing agency without registering with the government.
Failla permitted much of the action to continue, but denied the SEC's assertion that Coinbase functioned as an unlicensed broker via its wallet application.
The action against the world's biggest publicly-traded cryptocurrency exchange represents a high-water point in the regulator's drive to apply U.S. securities law to the digital asset businesses.
To do so, the SEC has mostly relied on a U.S. Supreme Court case that laid forth a threshold for whether an investment becomes a security. A critical aspect is whether rewards "come solely from the efforts of others."
Coinbase has maintained that crypto assets, unlike stocks and bonds, do not fulfill that criteria, a stance backed by the overwhelming majority of the crypto sector.
Failla rejected that argument, stating the SEC has a reasonable claim that at least some of the digital assets offered on the exchange are securities.
The SEC has referred to remarks by developers, including Solana Labs, concerning attempts to enhance 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 concluded.
In the rare instances that have gone to court, judges have usually agreed with the SEC that the crypto assets at issue were securities.
Unlike assets such as commodities that are carefully regulated, securities must be registered with the SEC by their issuer. They also demand extensive disclosures to notify investors of possible dangers.