SEC Claims Coinbase Knew It Was Violating the Law Prior to Lawsuit

In a recent filing, the U.S. Securities and Exchange Commission (SEC) argued that Coinbase, the popular cryptocurrency exchange, acknowledged years ago that Federal securities laws could apply to its listings. The regulator responded to a previous Coinbase filing, which claimed that the SEC lacked sufficient jurisdiction to bring a lawsuit against the exchange. The SEC sued Coinbase a month ago, alleging that it was operating as an unregistered broker, clearinghouse, and exchange, listing at least 13 cryptocurrencies that are considered unregistered securities.

The SEC firmly stated in its document that it would oppose any motion for judgment that Coinbase might file, and requested the court to strike Coinbase’s arguments that the suit violated the major questions doctrine and other concerns. The regulator highlighted Coinbase’s claims, stating, “Coinbase, a multi-billion-dollar entity advised by sophisticated legal counsel, argues it was unaware that its conduct risked violating the federal securities laws, and suggests that by approving Coinbase’s registration statement in 2021, the SEC confirmed the legality of Coinbase’s underlying business activities.”

However, the SEC countered Coinbase’s argument by pointing out that Coinbase had previously adopted the legal framework established by the U.S. Supreme Court to determine whether cryptocurrencies met the federal securities laws’ requirements. The SEC emphasized that Coinbase had explicitly discouraged crypto issuers from making statements typically associated with securities. Even Coinbase’s public filings stated that one potential risk for Coinbase investors was the possibility that listed assets might be considered securities.

The SEC further highlighted two flawed arguments made by Coinbase. Firstly, Coinbase claimed that an investment contract needed a formal contract, and secondly, it argued that investment contracts were only considered asset sales if they were traded on secondary markets. The SEC refuted these claims, stating that the Howey Test, which determines whether an arrangement involves an investment contract, does not require a formal contract. Additionally, the SEC asserted that transactions on secondary markets could still violate securities laws.

To support its arguments, the SEC referred to its recent legal victory against LBRY, illustrating that even transactions on secondary markets can be subject to securities laws. The SEC also dismissed Coinbase’s major questions doctrine argument, stating that the case involved the SEC’s exercise of longstanding authority to enforce statutory requirements.

A hearing has been scheduled for July 13 in the District Court for the Southern District of New York, where both Coinbase and the SEC will present their arguments. The outcome of this case could have significant implications for the cryptocurrency industry, as it will clarify the extent of the SEC’s jurisdiction over crypto-related activities.