Coinbase asks court to drop SEC lawsuit, says token is not an investment contract

A close watch Legal battle between the Securities and Exchange Commission and Coinbase took a new twist on Wednesday when the crypto exchange filed papers asking a New York federal court to dismiss the agency’s lawsuit alleging the company offered dozens of unregistered securities.

IN letter before U.S. District Judge Katherine Failla, Coinbase stated the lawsuit should be dropped in part because the digital assets it lists for trading are not “investment contracts”—one of a number of companies. instruments, including stocks and bonds, qualify as securities under U.S. regulation. law. If an asset in question is not a security, the SEC will not have the authority to regulate it.

According to Coinbase, the tokens it sells cannot be investment contracts because buyers and sellers are simply assets not tied to any contractual obligations.

In an interview with LuckCoinbase’s top attorney, Paul Grewal, compared the digital assets it lists—such as solana and Cardano—to the oranges that were part of a famous Supreme Court case called Howey provides criteria for determining an investment contract.

The Howey The case involved the sale of plots of real estate in Florida that included orange groves and the promise of buyer income from the sale of the fruit. The developer claimed the transactions were simply the purchase and sale of real estate and not securities, but the Supreme Court rejected this argument in part because the transactions involved profits derived from the endeavor. of others.

Coinbase’s position is that, in the case of tokens being sold on its platform, every investment contract occurs at an earlier stage—and takes place between token creators and those who purchased them immediately. from the beginning.

Grewal emphasized that Coinbase has an internal vetting process whereby more than 90% of all tokens are not eligible for sale.

In its regulatory filing, Coinbase also cites the theory, put forward by a former senior SEC official, that tokens that were once securities may no longer have that status as blockchains that store them date become more and more decentralized.

Coinbase’s argument that its listed tokens are simply assets and not investment tokens has not been rigorously tested in US courts, where crypto law is relative. new and still developing.

In making the case for dismissal of the lawsuit, Coinbase is also relying heavily on so-called “fair notification protection” based on the constitutional principle that governments cannot prosecute if they do not notify them. people about the relevant law at the matter.

In its records—including a note to Judge Failla and a official answer 177 pages to the SEC complaint—Coinbase relies heavily on public comments by SEC Chairman Gary Gensler, prior to 2021, implying that he believes the agency lacks the legal authority to regulate cryptocurrencies and based on the SEC’s own reference to a “regulatory loophole” in the field.

Coinbase’s Petition to Drop Case Comes as SEC Case Sets an existential threat for it and other US crypto companies.

A ruling on the motion of dismissal is likely to be made by the end of 2023. Coinbase’s attempt to win the case at this stage could go a long way as the burden of proving that the court should not hear the case is over. very high.

It is more likely that the case will be decided at the so-called summary judgment stage, when both sides make arguments based on sufficient evidence. Any summary judgment is likely to take place in 2024.


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