Judge: SEC's claims against Coinbase to move forward

Judge Katherine Polk Failla of New York ruled that a case involving the Securities and Exchange Commission and Coinbase is to proceed, denying the exchange's motion to dismiss the case. 

Judge Failla said the SEC has "sufficiently pleaded" that Coinbase operated as an exchange, broker and clearing agency, and engaged in the unregistered sale of securities through its staking program. However, the judge did decide to dismiss the SEC's claim that Coinbase acted as an unregistered broker when it made its Wallet application available to its customers, according to an order filed on Wednesday. 

Coinbase was sued by the SEC last year for allegedly operating as an unregistered exchange, broker and clearing agency. The regulator also took issue with Coinbase's staking and wallet services.

Coinbase has pushed back on the SEC's claims, arguing for the case to be dismissed and accusing the regulator of taking a "regulation by enforcement approach." 

Next, the case proceeds to trial and will be presented to a jury, though the process wouldn't likely start until 2025. The SEC and Coinbase also have to submit a proposed case management plan before April 19. 

"Today, the Court decided that our SEC case will move forward on most of the claims, but dismissed the claims against Coinbase Wallet," said Coinbase's Chief Legal Officer Paul Grewal on Wednesday on X. "We were prepared for this, and we look forward to uncovering more about the SEC’s internal views and discussions on crypto regulation."

Past cases

The SEC "plausibly alleges" that some crypto transactions on Coinbase's platform and through Prime were investment contracts, Judge Failla said. 

Throughout the order, the judge pointed to several key crypto cases, including Terraform where a judge sided with the SEC in its claim that the company offered and sold unregistered securities. 

"Several teachings can be gleaned from these thoughtful decisions," Failla said on Wednesday. "To begin, there need not be a formal contract between transacting parties for an investment contract to exist under Howey."

Howey, referring to the Howey Test, is based on a 1946 U.S. Supreme Court case frequently cited by the SEC, to determine if an asset qualifies as an investment contract and, therefore, a security. The test says an asset has to have three components —  an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. 

"Taking each in turn, the Court concludes that the SEC has adequately alleged that purchasers of certain crypto-assets on the Coinbase Platform and through Prime invested in a common enterprise and were led to expect profits solely from the efforts of others, thereby satisfying the Howey test for an investment contract," the judge said.

Coinbase was not acting as a broker 

Since 2017, retail and institutional customers can access a self-custodial wallet, called Coinbase Wallet. The SEC had alleged that Coinbase was acting as an unregistered broker through that service. 

Judge Failla said on Wednesday that wasn't so and said the SEC fell short of showing that Coinbase acted as a broker. The SEC did not say that the Wallet negotiates terms, makes investment recommendations, and said instead that Coinbase charged a one percent commission. The commission does not turn Coinbase into a broker, Judge Failla wrote. 

"In sum, even when considered in the aggregate, the factual allegations concerning Wallet are insufficient to support the plausible inference that Coinbase 'engaged in the business of effecting transactions in securities for the account of others' through its Wallet application," Failla said.

The crypto industry and major questions

Coinbase had argued that the major questions doctrine applied to the case. The doctrine says that if an agency, like the SEC, wants to decide on an issue that has major national significance, it has to be supported by clear congressional authorization. The major questions doctrine has two parts — one focused on whether the subject has a major impact on the nation’s economy or the public, and the second is whether a federal agency has explicit authority to implement new regulations. 

Judge Failla wasn't convinced. 

"First, while certainly sizable and important, the cryptocurrency industry 'falls far short of being a ‘portion of the American economy’ bearing ‘vast economic and political significance,’” they said. 

Coinbase had also argued that the SEC violated due process by bringing forward charges without first giving "fair notice."

"In support of their argument, Defendants make much hay out of a position taken by SEC Chair Gary Gensler in his May 2021 Congressional testimony, in which he suggested that 'only Congress' could address any gap in the SEC’s ability to regulate crypto-exchanges," Failla said. "Yet an examination of the broader timeline of the SEC’s positions regarding cryptoassets reveals that the SEC provided Coinbase (and similarly situated actors) fair notice — through written guidance, litigation, and other actions — that the sale or offering of certain crypto-assets could prompt an enforcement action by the SEC." 

Updated (March 27, 4:12 p.m. UTC): Added details throughout.