SEC’s Authority Over Digital Assets Questioned by Coinbase

Coinbase is fighting back against a lawsuit from the U.S. Securities and Exchange Commission (SEC), stating that the digital currencies on its platform are not within the jurisdiction of the SEC. This statement was made in the company’s initial legal rebuttal to the lawsuit filed by the regulatory body.

In early June, the SEC initiated legal action against Coinbase, arguing that twelve digital currencies offered through its wallet or trading interfaces were non-registered securities. However, in a response filed recently, Coinbase asserted that these digital assets are not investment contracts, and thus do not qualify as securities.

This line of defense has been previously put forward by Coinbase in public declarations, such as blog posts and tweets. However, this latest legal filing provides an elaborate explanation of the company’s standpoint. Coinbase maintains that the cryptocurrencies on its secondary market platform do not constitute part of any agreement where an asset linked to a contract is being sold by a promoter, essentially referencing the Supreme Court’s Howey case.

The company further stated in its filing that the token issuers are not obliged to investors. It argued, “Because no such obligations are included in the transactions over Coinbase’s secondary market exchange, and because the value that Coinbase purchasers receive through these transactions is inherent in the bought and traded items rather than in the businesses that produced them, the transactions are not securities transactions.”

In addition to echoing Coinbase’s previous public statements, the filing suggests that the current SEC Chair, Gary Gensler, has altered his stance on the regulator’s authority over cryptocurrencies between his appointment in April 2021 and mid-2022. Coinbase has made clear that it has been seeking regulation and mentioned that Congress has begun to consider the issue of cryptocurrency regulation.

The filing added, “Even if the SEC was correct in saying that the assets and services it identifies are within the scope of its existing regulatory authority, this action must be dismissed on the independent grounds that it infringes upon Coinbase’s due process rights and constitutes an extraordinary abuse of process.”

Coinbase alleges that its due process rights were violated by the SEC’s lawsuit. It requested the judge to allow it to file for judgement and proposed a 7-week schedule for its motion, the SEC’s opposition, and its response to the opposition.