Coinbase Joins a16z in Coalition Suing SEC Alleging ‘Unlawful’ Crypto Overreach

Coinbase is among the crypto giants that feature Andreessen Horowitz (a16z), which leveled charges against the US Securities and Exchange Commission (SEC), alleging erroneous enforcement actions. The lawsuit filed in Texas seeks regulatory clarity with the consortium comprising crypto industry juggernauts disapproving of the overreach. 

Crypto Consortium Alleges Overreach in SEC’s Enforcement Actions

The Crypto Freedom Alliance of Texas (CFAT) leads the Texas lawsuit alongside Fort Worth. Also, Texas-headquartered crypto exchange Lejilex is among the firms demanding judicial clarity over the Gary Gensler-led agency’s authority over the crypto transactions. 

The plaintiffs indicated that the Gensler-led SEC lacks the authority to impose enforcement actions against digital asset transactions. The plaintiffs disapprove of the agency’s frequent claims to oversee the crypto assets it classifies as securities.

The CFAT revealed in the Wednesday, February 21 press release that the SEC portrays an unpredictable yet unlawful approach. It yields uncertainty that prevents startup companies such as Lejilex from operating without fear of suffering enforcement actions. 

The CFAT features several crypto firms, including Ledger, Blockchain Capital, Coinbase, Paradigm, and a16z crypto division. Coinbase is already embroiled in an ongoing suit with the SEC, where the regulator alleges failure to register as a securities exchange despite offering several crypto securities on the platform. 

The recently filed lawsuit in Texas features a similar subject where CFAT embraces a preemptive state-level approach to fighting the SEC legally. 

The legal head at DeFi Education Fund, Amanda Tuminelli, hailed the lawsuit as the first time any crypto industry participant proactively sought judicial clarification on digital asset classification. 

Tuminelli believes the suit will help declare that secondary market sales of digital assets do not constitute securities transactions. The legal officer indicates that the suit will help prove that the crypto assets trading platform should not register with the Gensler-led regulator. 

Tuminelli likens the CFAT lawsuit in Texas as mirroring the argument advanced by Coinbase in the New York federal court. However, she noted that Lejilex is a centralized platform, not a non-custodial exchange.

CFAT Argues SEC’s Broadly Interprets Investment Contracts 

CFAT argues that the interpretation of investment contracts by the SEC is erroneous by constricting them within the Howey Test. Such doctrine is broad and would consider the securities sales from transactions that do not qualify. 

CFAT illustrates the case of Nike acquiring a limited edition of running shoes. The individual may buy such, harboring the intention to resell them at a higher price and leveraging the continued market efforts from Nike. 

CFAT argues that the SEC would, in its own terms, classify the sneakers as securities, with their resales perceived as securities transactions. CFAT indicates that the SEC would ultimately consider the auction houses that resell the shoes as unregistered securities exchanges. 

Lejilex co-founder Mike Wawszczak lamented the SEC’s approach as hampering the business environment. He added that Lejilex was wary of the rogue enforcement the SEC is handing the entrepreneurs. 

The CFAT lawsuit adds to the SEC’s existing criticism that extends within Congress and its ranks. 

The digital assets community is optimistic that the charges against Coinbase would be outright dismissed, just as those against Ripple Labs and Grayscale Investments collapsed last year. 

Howey Test Surfaces in Texas Lawsuit Against SEC

University of Kentucky scholar Brian Frye considers the legal arguments advanced by CFAT and Coinbase are not sure to draw wins. The professor considers the lawsuit a long shot to devising a bright-line test to differentiate securities and non-securities from non-securities. 

Although a tactical move, the test, deployed by the plaintiffs, is overly restrictive on the SEC to levels that the courts may decline to uphold. 

As interpreted by the SEC, the Howey Test considers the investment contract as money invested in a joint enterprise where such a party expects to draw profits from others’ efforts. 

Frye explains that the CFAT argument is that most cryptocurrencies hardly yield a direct stake in the common enterprise, thus failing the Howey Test. Though clever, such is not convincing considering that such can be said of the stockholders. 

The criticism of the SEC is set to take a twist with one of the regulator’s lawyers exiting the agency to assume a private sector role. The lawyer could offer support to the crypto industry’s argument.