Coinbase says SEC ‘lacks authority’ to bring lawsuit

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Coinbase Global (COIN) said late Wednesday that the Securities and Exchange Commission “lacks authority” to sue the largest US 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 law by operating an unregistered securities exchange, broker, and clearing agency. A key part of the SEC’s case is its claim that 13 different cryptocurrencies traded on the Coinbase platform are securities — and therefore should be regulated by Washington.

Coinbase, in its first legal response to the lawsuit, said the tokens named by the SEC are not securities and therefore fall outside the SEC’s scrutiny. They include Sol, ADA, and MATIC.

“Because as a matter of law none of them are, the claims must be dismissed,” the company said in a letter filed with a Manhattan federal court. It also made similar arguments in a longer 177-page filing Wednesday.

Coinbase’s stock rose 1.4% Thursday as of 2 p.m. It has doubled since the beginning of the year and is down 79% since its IPO two years ago.

The question of what constitutes a security will be key to a wide-ranging legal campaign by the SEC to crack down on the cryptocurrency industry.

It made a similar claim in a separate suit against Binance, the world’s largest cryptocurrency exchange, arguing that Binance had also violated securities law by allowing certain digital currencies to be traded on its platform.

Since the beginning of 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 relies on the so-called “Howey test.” This test has its origins in a 1946 Supreme Court case dealing with tracts of Florida orange groves sold by W.J. Howey Co. and leased back to the company.

The Supreme Court labeled these leaseback deals as investment contracts, meaning they needed to be registered with the SEC.

It also defined what constituted a security: “an investment of money in a common enterprise with profits to come solely from the efforts of others.”

Bitcoin, its defenders say, doesn’t meet that test. It wasn’t created, they say, by entrepreneurs seeking profits via pre-listed private sales to larger institutional investors — as other digital coins have.

It was instead created by anonymous software developer Satoshi Nakamoto in January 2009 as an open-source concept.

SEC Chair Gary Gensler as well as former Chair Jay Clayton have indicated in numerous public comments they do not believe bitcoin is a security.

Gensler’s comments

Lawyers for Coinbase pointed out in a document filed Wednesday that Gensler indicated a regulatory gap for cryptocurrencies existed a month after he took office in May 2021.

“There is not a market regulator around these crypto exchanges,” Gensler told Congress less than a month after he assumed his position as securities regulator head.

“I think it is only Congress that could really address it,” 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 businesses.

Under the prior administration, the SEC approved Coinbase to list as a public company on the Nasdaq in April 2021. As part of that registration process, the company said it filed an application with the SEC and was asked to clarify if any of the assets it listed were securities.

The exchange “proactively and extensively engaged with the SEC” prior to its IPO and continued to do so following its listing as a public company.

“At no point did the SEC suggest to Coinbase that the business it was describing was an unregistered securities exchange, broker, or clearing agency,” the lawyers said.

The stakes for Coinbase are high, Trevor Williams, an equity analyst with Jefferies, wrote in a research note Thursday.

“We continue to believe the case will need to play out through the courts, and if the SEC prevails, the path forward for COIN as a viable business would be in serious doubt,” said Williams, who has a Hold rating on the stock.

Source: Yahoo Finance

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