SEC: Coinbase before Lawsuit ‘Understood’ Securities Law Could Apply to Its Business

The US Securities and Exchange Commission (SEC) yesterday (Friday) filed its response to Coinbase’s rejection of its allegations, noting that the cryptocurrency exchange “understood that the securities laws could apply to its conduct.” The securities watchdog added that Coinbase “knew which rules to consider in evaluating the legality of its conduct” but decided to take the risk “in the name of growing its business.”

SEC Responds to Coinbase’s Rejection

In early June, the SEC dragged Coinbase to court, claiming that the leading crypto exchange in the United States, is operating an unauthorized trading platform on which it offered 12 crypto tokens that are unregistered securities. It further alleged that Coinbase runs an illegal crypto-staking service.

Responding to SEC’s lawsuit last month, Coinbase said that the SEC’s allegations “lack all merit,” adding that the regulator had no legal power to supervise its business. Digital assets listed on Coinbase are not ‘securities’ but ‘just an asset sale’, the exchange contended, citing the Howey Test. The test is a legal doctrine used to decide if a transaction passes as an investment contract, which is a type of security.

However, the SEC claimed that the exchange deployed the ‘legal framework’ of the test “as a basis for listing decisions that it now claims has no applicability to its activities.” The regulator also alleged that Coinbase ‘explicitly discouraged’ digital assets issuers to avoid ‘problematic statements’ that are ‘traditionally associated with securities’ in their marketing materials.

Previously, Coinbase pointed to the SEC’s authorization of its public debut on Nasdaq in April 2021 as evidence that it was not engaging in unregistered securities. However, in the response, the watchdog countered this.

“Since becoming a public company, Coinbase has repeatedly informed its shareholders of the risk that the crypto assets traded on its platform could be deemed securities and therefore that its conduct could violate the federal securities laws — including in the very registration statement it now points to as proof that the SEC supposedly blessed its conduct,” the SEC explained.

Is SEC Acting outside Its Jurisdiction?

Meanwhile, Coinbase in its legal response to the SEC argued that even if the Commission had the power to regulate its cryptocurrency exchange business, the watchdog’s lawsuit still violates its ‘due process rights' and this constitutes 'an extraordinary abuse of process’. The exchange said the ‘major questions doctrine’ should also be applied in such a situation, which means that the SEC will need new legal backing from the US Congress to regulate digital assets as securities.

Responding, the SEC picked holes in the argument, noting that the crypto exchange ‘misapprehends the purpose and reach' of the doctrine. The regulator believes that the doctrine is rooted in the ‘separation of powers concerns’.

“This case, by contrast, involves the SEC’s exercise of its longstanding authority to enforce statutory requirements,” the regulator said. “In 1934, Congress authorized the SEC to enforce the federal securities laws through civil law enforcement actions.”

In addition, the SEC noted that should the court approve Coinbase’s request to apply for an order that strikes out its claims, it will file a countermotion. Meanwhile, Finance Magnates reported that the US District Court in New York has fixed July 13, 2023, as the approved date to hear the case between both parties.