US leading crypto exchange in transaction volume, Coinbase, has been embroiled in unending legal conflict with the regulators since mid-2023. On Tuesday, Coinbase, a crypto exchange, gave a judge its ultimate view concerning the need to put to rest a lawsuit by the Securities and Exchange Commission (SEC). It argued that tokens should not be considered securities, and the SEC has surpassed its regulatory reach to initiate the lawsuit.
In a legal brief submitted before Katherine Polk Failla, the Southern District of New York Judge, the crypto exchange outlined its recent perspective. According to a court filing, it also criticized the regulator’s allegations earlier this month using a 40-page rebuttal.
SEC and Coinbase Legal Battle Mounts
In June, the SEC sued Coinbase, asserting that despite providing services to clients, the company refused to register as a clearing house, an exchange, and a broker. Additionally, the agency claimed the staking products offered by Coinbase featured volatile returns, unlike those described. Later that month, Coinbase sought the lawsuit’s dismissal.
Coinbase’s submission advances mainly a two-fold explanation. First, under the presumed’ investment contracts,’ tokens traded on the exchange are not securities. Secondly, the Securities and Exchange Commission contravenes the Major Questions Doctrine, which restricts regulators’ authority.
Despite a decision coming very soon, an individual privy to the situation revealed that the exchange’s motion is ‘quite complex’ compared to what the firm might desire.
Coinbase to Challenge SEC Ruling
Legal experts are considering that the motions for judgment sought by Coinbase often involve a complex process. Effectually, the filing requests the judge to dismiss the agency’s case before it starts. According to a motion for judgment on the pleadings, the court must evaluate the possibility of reaching a ruling as a matter of law. This is based on the postulation that the contents of the SEC’s case are factual.
The individual conversant with the situation claimed that in case the judge is not persuaded, Coinbase would ‘prefer going to trial within the shortest time possible.’ Additionally, they claimed that a discovery stage could take up to one year. The process would drag the trial date up to at least the onset of 2025.
Judge Katherine’s Involvement in Crypto Lawsuits
At this instance, Judge Katherine is quite familiar with crypto. In 2023 alone, she gave rulings favoring Uniswap, a decentralized finance (DeFi) giant, and Ripple. Last month, she evaluated how decentralized finance exchanges that utilize liquidity pools function.
In July, she established that on its face, Ripple ‘is not essentially a security.’ A crucial aspect of the Securities and Exchange Commission’s assertions is whether or not tokens traded on Coinbase account for tokens.
The SEC is required to identify if specific cryptocurrencies are securities to convince a court about Coinbase’s failure to register with the agency. Based on the Howey Test, the Securities and Exchange Commission indicates that it is inevitable that some tokens are securities.
The conviction arises from the ‘investment of cash in a common enterprise with a realistic profit anticipation to be acquired from others’ efforts.’ The Howey test surfaced from a 1946 Supreme Court case.
Nevertheless, the experts privy to the matter said the SEC’s lawsuit entails a mischaracterization of years of precedent, indicating the absence of a contractual pledge between token purchasers and sellers.
Review of Major Questions Doctrine
According to the Supreme Court, a contractual commitment on the seller’s side, offering some legal claim to the purchaser, is an investment contract’s vital element. The individual familiar with the case said the Securities and Exchange Commission does not recognize it.
The Supreme Court cited this theory this year when dismissing President Biden’s strategies for student loan forgiveness and claimed it was illegal.
Based on this theory, courts must assume Congress’s inability to delegate crucial questions concerning political and economic significance to executive agencies, for instance, the Securities and Exchange Commission. Concerning crypto, Coinbase asserts that it is a significant question.