The Regulator Alleges That Prior to the SEC’s Lawsuit, Coinbase Knew It Might Have Broken the Law
The U.S. Securities and Exchange Commission argued that years ago, in a recent filing, Coinbase acknowledged the possibility that federal securities laws could apply to its listing.
The regulator responded to a filing from Coinbase claiming that it does not have the authority to file a lawsuit. The SEC filed a lawsuit against Coinbase a month ago. It claimed that it doubled as a broker, clearing house and exchange and listed at least thirteen different cryptocurrencies that are unregistered. The SEC said in a document released Friday that it will oppose Coinbase’s motion for judgment and ask a court not to accept Coinbase’s argument that the lawsuit violates the Key Questions doctrine and other concerns.
The SEC stated in its filing that “Coinbase is a multi-billion dollar company advised by experienced legal counsel. She argues that she was unaware of the risk that her conduct might violate state securities laws. And proposes that…” By approving Coinbase’s registration statement in 2020, the SEC has confirmed the legality of Coinbase’s underlying operations — both now and forever.”
The regulator stated that Coinbase “adopted the precise legal framework” enacted by the U.S. Supreme Court to determine whether certain cryptocurrencies meet the requirements of federal security laws, while “strongly discouraging” the use of such cryptocurrencies.[ing]Crypto issuers are prohibited from making statements that “traditionally refer to securities”.
Coinbase’s public filings indicate that listed assets may qualify as securities, posing a potential risk for Coinbase investors.
The filing states: “These actions clearly demonstrate that Coinbase knew securities laws could be applied to its conduct. It also knew what rules to consider when assessing its legality. However, it made the calculated decision to grow its business.” to take that risk.
The SEC also previewed its arguments against Coinbase’s proposed judgment motion, stating that the crypto exchange made two “equally flawed arguments.”
Coinbase’s first argument was that an investment contract must contain a written contract, while the second argument was that investment contracts are asset sales only if they are traded on the secondary market.
The SEC stated that while the Howey test does not require a formal contract, transactions in the secondary market may still violate securities laws.
In support of this argument, the SEC cited its recent court victory against LBRY.
The SEC also said that Coinbase’s argument on the Key Questions Doctrine was wrong. “In this case, the SEC is exercising its longstanding authority to enforce statutory provisions.” Congress authorized the SEC in 1934 to enforce federal securities laws through civil actions.
The District Court for the Southern District of New York has scheduled a hearing for July 13.
UPDATE (July 7, 2023 at 21:35 UTC). Adds additional details.
