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SEC vs. Coinbase: Hearing, Filings, Court Dates and Details in Full

Last Updated September 1, 2023 10:10 AM
Teuta Franjkovic
Last Updated September 1, 2023 10:10 AM
Key Takeaways
  • Coinbase says SEC allowed it to advertise digital assets when gone public.
  • SEC later labeled them as unregistered securities.
  • Coinbase CLO urged the court to order SEC to reply to its regulation petition.
  • XRP lawyer supports Coinbase and said SEC’s response was noncommittal.
  • SEC has sued Coinbase only one day after it sued Binance.

The cryptocurrency company Coinbase submitted a formal motion in a federal court on June 17, following a protracted period of silence and evasive responses from the United States Securities and Exchange Commission (SEC).

New Lawyer for Coinbase

The Coinbase v. United States Securities Exchange Commission lawsuit has received support from the crypto community, digital asset associations, and policymakers. In a recent development, a new lawyer, Patrick V. Kennedy, has joined the fight and is requesting permission from the court to act as amicus counsel on behalf of the Chamber of Digital Commerce.

Patrick V. Kennedy of McDermott Will & Emery filed a request  to be admitted pro hac vice, which means “for this occasion,” with the intention of acting as counsel for amicus the Digital Commerce Chamber on August 31.

The Chamber of Digital Commerce has contributed significantly as an amicus curiae in the ongoing Coinbase v. SEC litigation together with the Blockchain Association. An ‘amicus’ is a party or a person who joins the case but is not actively involved in, only giving advices to the court.

Through enforcement proceedings, the Chamber of Digital Commerce seeks to halt the SEC’s attempts to regulate the digital asset market, contrary to congressional goals. The SEC’s actions provide unclear guidelines instead of specific cryptocurrency rules sanctioned by Congress. Notably, Congress has never granted explicit permission for the SEC to regulate digital assets.

Coinbase executives Brian Armstrong and Paul Grewal remain optimistic that the case will be dismissed. Grewal contends that SEC Chair Gary Gensler is impeding cryptocurrency development in the US, while legislators have called for the complaint’s dismissal.

Coinbase Requests Litigation Dismissal

In recent developments, Coinbase filed an “Answer to Plaintiff’s Complaint ” with the US District Court for the Southern District of New York. They claim that when the SEC approved Coinbase’s public offering in May 2021, they were fully informed about all operations, including staking and listing. Coinbase is now requesting the dismissal of the SEC’s allegations due to lack of merit.

In a 177-page document, Coinbase refutes the SEC’s allegations that 12 listed crypto tokens on their platform are securities. Notably, six of these tokens were already being traded on Coinbase when the SEC approved their IPO. Since the SEC had not classified any crypto assets as securities at that time, Coinbase argues that the legal claims should be dismissed.

Coinbase has expressed readiness to engage with regulatory bodies, including the SEC, to chart the way forward, mirroring its request for arbitration with California users, which the Supreme Court approved.

The exchange also maintained that the SEC lacks jurisdiction to regulate the burgeoning cryptocurrency industry due to the absence of relevant laws passed by Congress.

Coinbase also contended that, as a global and evolving market, the cryptocurrency industry necessitates new legislation from Congress. Failure to do so risks ceding technological leadership to nations like Europe, China, and Singapore, which have already established clear cryptocurrency regulations.

Coinbase Addresses SEC’s Response to June 6 Order

Coinbase Chief Legal Officer, Paul Grewal, tweeted: “We couldn’t wait until our deadline next week to address the SEC’s response to the June 6 order from the Third Circuit.”

“It is unusual for the government to reject a straightforward query from a federal court.”

The corporation was reportedly asking for “mandamus,” which is a court order given to a government organization by a higher court for the company to carry out a particular action or obligation that they are legally required to undertake.

Coinbase was asking a federal judge to order the SEC to establish clearer laws and standards for the digital assets business. The cryptocurrency exchange made a same request to the court in a petition filed last year.

For Coinbase Cryptos Are Different From Securities

The crypto industry has long stressed the need for regulatory clarity in the U.S., with Coinbase under SEC scrutiny regarding unregistered securities. Coinbase contends that cryptocurrencies, being fundamentally distinct from traditional securities, should not be classified as such.

They operate on decentralized networks, utilize cryptographic technology, and have multifaceted functions beyond securities.In the latest development, Coinbase has been accused of operating illegally without first registering with the regulator, and the SEC filed a lawsuit against it on Tuesday, June 6.

SEC Lays New Charges Against Coinbase

The lawsuit came only one day after the SEC sued Binance, the world’s largest cryptocurrency exchange, and its founder, Changpeng Zhao.

Both actions are a part of SEC Chair Gary Gensler’s initiative to give investors who trade virtual currencies, additional protection.

“Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection,” Gensler wrote in a tweet .

In a complaint filed in Manhattan federal court, the SEC alleged that Coinbase had generated billions of dollars since 2019 through Bitcoin transactions without complying with disclosure rules meant to protect investors.

The complaint scrutinized various aspects of Coinbase’s operations, including Coinbase Prime for order management, Coinbase Wallet for liquidity access, and the Coinbase Earn staking program.

In the staking program, Coinbase pools cryptocurrency assets and uses them to expedite blockchain network activity, providing clients with “rewards” after taking a portion for itself. The SEC claimed that Coinbase was fully aware of its obligations under federal securities laws but chose to ignore them.

Gurbir Grewal, the head of SEC enforcement, said in a statement : “You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones.

SEC Vs. Coinbase – All you need to know 

In the latest development, the SEC responded  to Coinbase’s petition for a writ of mandamus on May 15, asking the court to require the SEC to respond with a simple ‘yes’ or ‘no’ regarding whether it will undertake rulemaking for the crypto industry.

With this latest response from the SEC, Coinbase expresses anticipation for the upcoming opportunity to provide a formal reply and filed a formal mandamus  on May 22. The company acknowledges and values the Court’s diligent and thoughtful consideration of the matter at hand.

On May 15, SEC took the initiative to file a court order in an attempt to dismiss Coinbase’s request for a response to its rules petition . However, it also acknowledged its ongoing reliance on enforcement actions as a substitute for rulemaking in the foreseeable future.

The absence of clear guidelines hinders productive activities, stifles innovation, and undermines the broader economic and strategic interests of the United States.  Even the Chamber of Commerce expressed its concern that the Securities and Exchange Commission’s (SEC) lack of clarity has resulted in economic damage not only to Coinbase but also to the wider business community.  

To resolve this issue, Coinbase, a month ago, urged the Third Circuit Court of Appeals to compel the SEC to provide “regulatory clarity” concerning the application of existing securities laws to the rapidly evolving digital asset industry.

Allegedly, the exchange’s filing seems to be a proactive measure to argue that the SEC’s current approach fails to offer adequate regulatory guidance for U.S. companies operating in the crypto sector. 

What is Coinbase Doing about the SEC?

Aside from taking court action, Coinbase has taken action against the U.S. Securities and Exchange Commission (SEC) by launching #Crypto435 , a campaign in which more than 25,000 Americans from all 435 Congressional Districts have signed up to be crypto advocates. Coinbase is providing two additional ways to involve people. 

They are hosting Crypto435, where participants can hear from Brian Armstrong, Coinbase’s Founder and CEO, about important policy issues and ask questions. Additionally, individuals can sign an open letter urging Congress to pass legislation supportive of the crypto industry.

Also, in a more focused move, Coinbase has initiated legal action  by filing a petition in federal court with a specific objective: to compel the Securities and Exchange Commission (SEC) to provide a straightforward response, either a “yes” or “no,” to Coinbase’s pending rulemaking petition.

The petition urges the SEC to offer long-awaited guidance for the cryptocurrency industry, emphasizing the need for clarity and regulatory direction.

Lastly, during an interview with CNBC’s  Dan Murphy in Dubai, Coinbase CEO Brian Armstrong expressed his observation regarding Securities and Exchange Commission (SEC) Chair Gary Gensler’s stance on cryptocurrencies. “There’s kind of a lone crusade, if you will, with Gary Gensler, the chair there, and he has taken a more anti-crypto view for some reason,” Armstrong said.

What Do Lawyers Say?

According to Murphy, if the Securities and Exchange Commission (SEC) proceeds with its threat to sue Coinbase, it is likely to lose the legal battle . “If the SEC follows through on its threat to sue Coinbase, I believe the SEC will lose. The SEC’s case has a fatal flaw. And the problem is entirely of Gary Gensler’s own making.”

Another attorney representing Ripple commented that the SEC’s motives looks driven by a political agenda rather than a strong legal case.

Gary Gensler, the SEC Chair, plays a significant role in this context, and his approach could be considered a fatal flaw in the entire case . However, the SEC said that the public statements by Chair Gensler are not formal guidance or policy statements from the SEC and the public cannot rely on them as such.

Lastly, Brad Garlinghouse, CEO of Ripple Labs, has even mentioned  a potential “Crypto Exodus” from the U.S. due to the SEC’s actions and regulatory uncertainties. 

Conclusion

The ongoing Coinbase vs. SEC battle underscores the pressing need for regulatory clarity in the cryptocurrency industry. Ambiguities and inconsistent enforcement stifle innovation and economic growth.

Coinbase’s legal actions, including the petition and #Crypto435 campaign, signal its commitment to clarity and community protection.

Yet, the outcome remains uncertain, with potential years before a court decision on the mandamus petition. Meanwhile, industry challenges persist, fueling the demand for comprehensive regulations.