Coinbase Global (COIN) said late Wednesday that the Securities and Exchange Commission has “no authority” to sue the largest U.S. crypto exchange, the latest in its ongoing legal war with the powerful Washington regulator.
The SEC alleged in a lawsuit filed earlier this month that Coinbase violated securities laws by operating an unregistered stock exchange, broker and clearing house. A key part of the SEC’s case is the allegation that 13 different cryptocurrencies traded on the Coinbase platform are securities — and should therefore be regulated by Washington.
Coinbase said in its initial legal response to the lawsuit that the SEC-listed tokens are not securities and are therefore outside the SEC’s oversight. They include Sol, ADA and MATIC.
“Because by law none of them are, the claims must be dismissed,” the company said in a letter filed in a Manhattan federal court. It also made similar arguments in a longer 177-page submission on Wednesday.
Coinbase shares rose 1.4% as of 2 p.m. on Thursday. It’s doubled since the start of the year and is down 79% since going public two years ago.
The question of what constitutes a security will be key to a wide-ranging SEC legal campaign to crack down on the cryptocurrency industry.
It made a similar claim in a separate lawsuit against Binance, the world’s largest cryptocurrency exchange, arguing that Binance had also violated securities laws by allowing certain digital currencies to be traded on its platform.
Since early 2023, the SEC has charged 15 different crypto actors with violating securities laws.
The Howey Test
The SEC’s framework for evaluating digital assets as securities is based on the so-called “Howey Test”. This test has its origins in a 1946 Supreme Court case involving tracts of Florida orange groves owned by WJ Howey Co. were sold and leased back to the company.
The Supreme Court labeled these leaseback deals as investment contracts, which meant they had to be registered with the SEC.
It also defined what a security was: “an investment of money in a common venture whose profit derives solely from the efforts of others.”
Bitcoin, defenders say, fails that test. It was not created, they say, by entrepreneurs seeking profit through pre-listed private sales to larger institutional investors – as other digital coins have done.
It was instead created in January 2009 by anonymous software developer Satoshi Nakamoto as an open-source concept.
SEC Chairman Gary Gensler and former chairman Jay Clayton have stated in numerous public comments that they do not believe bitcoin is a security.
Coinbase attorneys pointed out in a document filed Wednesday that a month after taking office in May 2021, Gensler indicated a regulatory loophole for cryptocurrencies existed.
“There is no market regulator around these crypto exchanges,” Gensler told Congress less than a month after taking over as head of the securities regulator.
“I think only Congress can really address this,” he added in response to a question from US Representative Patrick McHenry about how the SEC could bring more clarity to the US crypto market.
Coinbase and other companies have also argued that the SEC has no viable path for crypto issuers or companies offering cryptocurrencies to register with the agency. The agency has granted a select number of crypto security broker-dealer licenses. Few if any currently operate as a business.
Under the prior administration, the SEC approved Coinbase to be listed as a public company on the Nasdaq in April 2021. As part of that registration process, the company said it filed with the SEC and was asked to clarify whether any of the assets it listed were securities.
The exchange was “proactively and extensively engaged with the SEC” prior to the IPO and continued to do so after listing as a public company.
“At no point did the SEC suggest to Coinbase that the company it described was an unregistered stock exchange, broker or clearing house,” the lawyers said.
The stakes are high for Coinbase, Trevor Williams, an equity analyst at Jefferies, wrote in a research note Thursday.
“We continue to believe the matter will have to be played out through the courts, and if the SEC prevails, the way forward for COIN as a viable company would be in serious doubt,” said Williams, who has a Hold rating on the stock.
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