Mar 27, 2024 - Business

Most of the SEC's case against Coinbase will proceed

the head of a man looking upward, with short-cropped hair, a blue-grey suit jacket and checked white shirt.

Coinbase's Paul Grewal, the chief legal officer. Photo: Ting Shen/Getty

Coinbase notched a very minor win against the U.S. Securities and Exchange Commission on Wednesday, but the essence of the agency's case against the nation's largest cryptocurrency exchange will proceed.

Why it matters: If the SEC's argument that most cryptocurrencies are securities under U.S. law prevails in court, it would limit who can hold them, or use the new asset class.

  • It would also be an existential threat to the exchange — and, in fact, the cryptocurrency industry itself (at least, within the United States).
  • "When intermediaries don't register, it's investors who get hurt and the American financial markets that suffer. We will continue to protect investors against risks in the crypto markets when, as here, the securities laws are implicated," the SEC said in a statement sent Axios.

Driving the news: Coinbase had moved to dismiss the case entirely. However, the judge in the case, Katherine Failla, has denied the motion.

What they're saying: "Having now carefully considered the parties' arguments ... the Court concludes that because the well-pleaded allegations of the Complaint plausibly support the SEC's claim that Coinbase operated as an unregistered intermediary of securities, Defendants' motion must be denied in large part," Failla writes in her decision.

  • "We were prepared for this, and we look forward to uncovering more about the SEC's internal views and discussions on crypto regulation," Paul Grewal, Coinbase's chief legal officer, posted on social media.

Yes, but: The court ruled that the case against one product, Coinbase Wallet, could be dimissed.

  • That app that lets users interact with various blockchains and send cryptocurrency easily. The company does not mention it as a source of revenue, however, in its most recent shareholder letter.

Friction point: Coinbase has also sued the SEC over its refusal to issue crypto-specific regulations.

  • This speaks to a larger strategy from the firm: taking a combative approach, rather than the attempted collaboration that cryptocurrency businesses pursued for most of the industry's history.
  • Other firms are following Coinbase's lead.

Of note: Few blockchain-based businesses that have registered with the SEC have survived the process of doing so.

The bottom line: The SEC's case will proceed, which doesn't necessarily mean that the court agrees with the agency. It just means that they presented adequate facts such that the case should be heard.

What's next: The parties have till April 19 to submit a case management plan, to decide what the key issues are in the case and how to pursue them at trial.

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