A federal judge said that the U.S. Securities and Exchange Commission’s lawsuit against Coinbase should proceed because it presented a strong enough case to support its claim that the cryptocurrency business is running an unregistered broker, exchange, and clearinghouse.
The majority of Coinbase’s move to have the SEC complaint dismissed was denied by U.S. District Court for the Southern District of New York Judge Katherine Polk Failla on Wednesday, who determined that the SEC had a “plausible” case against the exchange. She gave the parties until April 19 to decide on a case scheduling schedule.
The SEC filed a lawsuit against Coinbase last year in the same week that it filed a lawsuit against Binance, another exchange, on the grounds that Coinbase had broken federal securities rules by providing trading and staking services to the general public. Additionally, it claimed that Coinbase Wallet operated like an unlicensed brokerage.
The SEC appeared to be arguing that some of the coins displayed on Wallet would qualify as “investment contracts,” according to the judge, but Coinbase didn’t appear to be operating as a brokerage, so that portion of the lawsuit was dismissed.
She dismissed arguments that the SEC is in violation of the Administrative Procedures Act or the Major Questions Doctrine, a U.S. Supreme Court decision that forbids government agencies from going beyond their legislative mandates, and said that the other parts of the lawsuit may move forward. The judge determined that Coinbase was aware that the SEC was pursuing legal action against cryptocurrency companies, citing the DAO Report and earlier court proceedings.
“When a customer purchases a token on Coinbase’s platform, she is not just purchasing a token, which in and of itself is valueless; rather, she is buying into the token’s digital ecosystem, the growth of which is necessarily tied to value of the token,” she explained. “This is evidenced by, among others, the facts that (i) initial coin offerings are engineered to have resale value in the secondary markets and (ii) crypto-asset issuers continue to publicise their plans to expand and support the token’s blockchain long after its initial offering.”
Likewise, she pointed out that token creators “promote the fact that capital raised through retail sales of tokens will continue to be re-invested.”
These lawsuits, like the SEC’s case against Ripple, frequently overcome prior petitions to dismiss. Although the courts must accept the accusations as true, the case’s fundamental issues will be discussed at a later time.
The case is one of several that might establish guidelines for the U.S. cryptocurrency market’s operations. The SEC appears to want a judge to find that exchanges must be regarded like national securities exchanges, which would impose new laws and transparency requirements on these trading platforms and possibly reduce the quantity of tokens available to individual investors.