Coinbase says SEC is out of bounds in latest brief of ongoing lawsuit

Quick Take

  • Lawyers representing crypto exchange Coinbase said a New York judge should throw out a case brought in June by the Securities and Exchange Commission.

Lawyers representing crypto exchange Coinbase say a New York judge should throw out a case brought by the Securities and Exchange Commission, insisting that the agency was out of bounds. 

The SEC charged Coinbase in June for not registering as a securities exchange, broker and clearing agency, but the U.S.-based exchange clapped back on Tuesday, arguing that the agency's authority is limited to securities transactions. 

"Investment contracts grant the purchaser a contractual claim related to the future income, profits, or assets of a business enterprise. That is what makes them securities rather than just investments," Coinbase said in a filing. "Because the SEC’s Complaint does not and cannot plead that the simple asset trades it identifies involve ongoing contractual obligations related to a business enterprise, Coinbase is entitled to judgment on the pleadings."

By the SEC's current argument, an investment contract would exist if someone expects their purchase to increase in value or if they part with capital, Coinbase argued. This in turn would give the SEC authority over many different things, the exchange said. 

"Consider an artist who sells paintings over Etsy with a note that she is planning to exhibit her work in a gallery next month. Those who read the note might buy the paintings hoping the artist's plans to increase her exposure will drive up the value of her work. In the SEC's conception, each sale and resale of the paintings on Etsy would be a securities transaction," Coinbase said.

The SEC has cited the Howey Test, a 1946 U.S. Supreme Court case involving citrus groves to determine whether transactions are investment contracts and thus subject to securities laws. Coinbase said that the SEC stretched its arguments in Howey "beyond recognition." 


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Support for SEC

Other regulators showed support for the SEC in an amicus brief filed in the same case earlier this month. The North American Securities Administrators Association, a group of state securities regulators, said the court should not treat digital assets as "somehow special."

Coinbase also asserted in its Tuesday filing that the major questions doctrine does apply, despite critics saying it doesn't. The doctrine says that if an agency wants to decide on an issue that has major national significance, it has to be supported by clear congressional authorization. 

Judge Katherine Polk Failla is overseeing the case between the SEC and Coinbase. Failla, who was appointed by former President Barack Obama in 2013, recently dismissed a case in full regarding a class action lawsuit brought against Uniswap Labs, the Uniswap Foundation and investors Paradigm, Andreessen Horowitz and Union Square Ventures. 

Failla declined to "stretch" federal securities laws in that case, suggesting that such expansions are the domain of Congress. 

© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

About Author

Sarah is a reporter at The Block covering policy, regulation and legal happenings. Before, Sarah was a reporter with CQ Legal writing about securities regulation, which is where she first started reporting on crypto. Sarah has also written for The Bond Buyer and American Banker, among other finance-related publications. She graduated from the University of Missouri and earned a degree in print and digital journalism. Sarah is based in Washington D.C., and is an avid coffee lover. You can follow her on Twitter @ForTheWynn.


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