Coinbase scores minor victory vs SEC, but lawsuit to proceed

A federal judge in Manhattan, U.S. District Judge Katherine Polk Failla, ruled on Wednesday that the U.S. Securities and Exchange Commission’s (SEC) lawsuit against Coinbase can largely proceed.

The lawsuit alleges that the largest U.S. cryptocurrency exchange has violated securities laws by facilitating the trading of at least 13 crypto tokens that should have been registered as securities. Coinbase is also accused of operating as a national securities exchange, broker, and clearing agency without the necessary registration.

However, Judge Failla did grant Coinbase’s motion to dismiss one part of the SEC’s lawsuit. The claim that Coinbase acted as an unregistered broker through its wallet application was dismissed, providing a partial victory for the exchange in what promises to be a protracted and costly legal battle. Despite this, the ruling overall supports the SEC’s stance on cryptocurrency regulation and aligns with previous court decisions favoring the regulator.

Following the news, Coinbase shares dipped approximately 1.5% in early afternoon trading. Paul Grewal, Coinbase’s Chief Legal Officer, expressed on the social media platform X that the company was prepared for the ruling and remains determined to contest the SEC’s allegations. “We remain confident in our legal arguments, we look forward to proving we’re right,” Grewal stated.

The SEC welcomed the decision, with a spokesperson stating, “We are pleased that yet another court has confirmed that, while the term ‘crypto’ may be relatively new, the framework that courts have used to identify securities for nearly 80 years still applies.”

This lawsuit represents a critical point in the SEC’s efforts to extend U.S. securities law over digital asset companies. The agency is mostly relying on a long-standing Supreme Court ruling that defines what constitutes a security, particularly focusing on whether returns are “come solely from the efforts of others.” Coinbase, along with much of the crypto industry, argues that crypto assets do not meet this definition.

However, Judge Failla disagreed with Coinbase’s stance, indicating that the SEC has a plausible claim that some digital assets listed on the exchange qualify as securities. The judge referenced statements by developers, such as Solana Labs, about their ongoing efforts to develop their technology, suggesting that these could lead investors to expect profits derived from the efforts of others.