Coinbase and SEC Lock Horns over Securities Regulation

Updated: 04 October 2023

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Coinbase, a prominent U.S. cryptocurrency exchange, was charged by the U.S. Securities and Exchange Commission (SEC) earlier in June for allegedly offering unauthorized securities and providing brokerage and clearing agency services without proper registration. To counter, Coinbase had submitted a motion to dismiss in late August, asserting that their crypto tokens weren’t “investment contracts” and, therefore, the SEC shouldn’t regulate them.

However, the SEC wasn’t convinced. On October 3, the regulator countered with a 40-page opposition document as evidenced by CourtListener, urging the court to reject Coinbase‘s motion in full. The regulatory body aimed to substantiate its initial grievance, stating in the recent court document that their arguments were “thoroughly grounded.”

The Howey Test

A significant point of contention revolves around the Howey Test – a criterion established in 1946 following the U.S. Supreme Court’s case with W.J. Howey Co., to decide if an asset qualifies as a security. The SEC emphasizes that this test, known for its adaptability, doesn’t necessarily necessitate an investment contract. They further elaborated that crypto assets fall under its scope if they satisfy the Howey criteria. The filing contains references to various statutes and case laws supporting the relevance of the Howey Test to digital assets.

Furthermore, the SEC took issue with Coinbase’s insinuation that the regulator had given it a green light for its alleged breaches when it went public. The SEC also clarified that comments made by SEC Chair Gary Gensler during a Congressional discussion weren’t pertinent to how federal securities laws are applied in court. The regulator firmly refuted Coinbase’s claim of the SEC lacking jurisdiction over securities transactions involving cryptocurrencies. They noted that Coinbase should’ve been aware that a crypto asset on their platform becomes a security if it aligns with the Howey criteria.

Moreover, the SEC pointed out that Coinbase’s Ethereum staking service, which promises yearly returns from a pool overseen by Coinbase, is classifiable as a security.

Reacting to the SEC’s recent court document, Coinbase’s Chief Legal Officer, Paul Grewal, took to Twitter. He expressed his perspective, suggesting that the SEC’s stance wasn’t anything novel. In a tweet he indicated that based on recent court verdicts, including the SEC’s defeat against Ripple concerning XRP’s securities status, tokens on Coinbase shouldn’t be considered securities.

The @SECgov just filed its opposition to our motion to dismiss their case against @Coinbase. It’s more of the same old same old. But don’t just take my word for it – take a look for yourself. 1/7 https://t.co/QMdkRoiq0V

— paulgrewal.eth (@iampaulgrewal) October 3, 2023

Grewal even humorously critiqued the SEC’s broad definition, saying that even “Pokemon cards and stamps” might be deemed securities by that logic, referencing a query by U.S. legislator Rep. Ritchie Torres to Gensler during a committee hearing. Grewal concluded by revealing Coinbase’s intention to submit its counter-response by October 24.