SEC scores a major win in its lawsuit against Coinbase; case heads to trial as judge rules suit can proceed

In a significant legal development, the US Securities and Exchange Commission (SEC) secures a pivotal win in its lawsuit against leading cryptocurrency exchange Coinbase. Following a ruling by a federal judge on Wednesday, it has been determined that the SEC’s allegation regarding Coinbase’s involvement in unregistered securities sales will proceed to a jury trial.

This decision holds weighty implications as it opens avenues for the case to advance, potentially establishing a precedent for the regulation of cryptocurrency exchanges within the United States. Notably, Coinbase witnessed a dip of approximately 2% in its shares following the news of the ruling from the Manhattan federal court, which dismissed its attempt to dismiss the SEC’s complaint. CNBC reported.

The SEC initially filed the suit against Coinbase back in June, stating that the exchange operated as an unregistered broker and exchange, seeking permanent injunctions against such activities.

“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As alleged in our complaint, Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them. While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices.”

In her ruling, US District Judge Katherine Polk Failla asserted that despite the relatively recent emergence of cryptocurrencies, the transactions under scrutiny align with the long-standing framework courts have employed in identifying securities. Failla affirmed the SEC’s claim that Coinbase’s Staking Program engaged in the unregistered sale of securities, while simultaneously dismissing the SEC’s allegation regarding Coinbase’s Wallet application.

“The ‘crypto’ nomenclature may be of recent vintage, but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years,” U.S. District Judge Katherine Polk Failla wrote in her ruling.

“The Court finds that the SEC adequately alleges that Coinbase, through its Staking Program, engaged in the unregistered offer and sale of securities,” Failla wrote.

Coinbase’s response, as articulated by the company’s chief legal officer Paul Grewal, emphasized preparedness and eagerness to delve into the SEC’s internal perspectives on crypto regulation.

This legal development unfolds against the backdrop of Coinbase assuming a prominent role in facilitating Wall Street’s embrace of cryptocurrencies. Notably, the SEC’s approval of several US spot bitcoin exchange-traded funds (ETFs) in January, many of which have partnered with Coinbase, underscores the exchange’s growing significance in mainstream financial markets.

SEC Chair Gary Gensler’s past remarks regarding trading platforms like Coinbase, highlighting concerns over their multifaceted functions akin to exchanges and hedge funds, contextualize the regulatory scrutiny faced by such entities.

It’s imperative to note that while this ruling marks a pivotal step in the legal proceedings, it does not constitute a final verdict. Coinbase retains the opportunity to defend its position in court. This lawsuit forms part of the SEC’s broader efforts to enhance oversight within the cryptocurrency industry, echoing similar litigations against other companies like Ripple. Consequently, the outcome of this case carries substantial implications for the trajectory of cryptocurrency trading regulation in the US.