SEC Scores Legal Victory Against Coinbase in Lawsuit Over Unregistered Securities Sales

In a legal triumph for the Securities and Exchange Commission (SEC), a Manhattan federal court ruled on Wednesday that the SEC’s claim against cryptocurrency exchange Coinbase, regarding its alleged engagement in unregistered sales of securities, will proceed to trial.

Coinbase experienced a decline of approximately 2.5% in its shares following the news of the ruling, as the court rejected its motion to dismiss the SEC’s complaint.

The SEC initiated the lawsuit against Coinbase in June, alleging the exchange of acting as an unregistered broker and exchange. The regulatory body sought to permanently restrain Coinbase from continuing such activities.

U.S. District Judge Katherine Polk Failla, in her ruling, stated, “The ‘crypto’ nomenclature may be of recent vintage, but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years.” Failla affirmed that the SEC adequately presented allegations against Coinbase, particularly regarding its Staking Program, for engaging in unregistered offer and sale of securities.

However, the judge dismissed the SEC’s claim that Coinbase acted as an unregistered broker by offering its Wallet application to customers.

Subsequently, the SEC filed a notice of Failla’s decision in the Coinbase case within its lawsuit against Binance, another major cryptocurrency exchange, pending in federal court in the District of Columbia. The SEC accuses Binance of multiple unregistered offers and sales of crypto asset securities.

This development coincides with Coinbase’s increasing involvement in Wall Street’s adoption of cryptocurrency. Notably, in January, the SEC approved several U.S. spot bitcoin exchange-traded funds (ETFs), many of which partnered with Coinbase as their custody partner. These ETFs have witnessed record flows since their launch, accumulating approximately $52 billion collectively.

Last year, SEC Chair Gary Gensler hinted at concerns regarding centralized crypto exchanges, suggesting that they were blurring various functions and potentially behaving akin to hedge funds. This stance could bolster decentralized crypto exchanges, emphasizing their core principles of self-custody. Centralized exchanges, on the other hand, might be viewed more as brokerage firms than true exchanges.

The legal battle between Coinbase and the SEC underscores the evolving regulatory landscape surrounding cryptocurrencies and the significant implications for major players in the industry.