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Coinbase Clashes with SEC: A Legal War for Crypto-Exchange Dismissal

In a growing tussle with the US Securities and Exchange Commission, Coinbase is making a strategic move to have the SEC’s lawsuit dismissed.

Logos of Coinbase and SEC
Logos of Coinbase and SEC

Coinbase Urges Dismissal of SEC Lawsuit

In a fresh development in the ongoing legal spat between Coinbase, the American cryptocurrency exchange, and the United States Securities and Exchange Commission (SEC), Coinbase has initiated a motion to dismiss the SEC's complaint. The motion, filed on Thursday, June 29 in the U.S. District Court for the Southern District of New York, manifests Coinbase's intent to fervently dispute the SEC's lawsuit.

The motion brings to light Coinbase's concerns about the SEC's interpretation of securities laws, implying that the commission might be overreaching its legal powers. The company's legal team argues that even if all allegations in the lawsuit hold, the plaintiff lacks a valid legal claim. "Even if the SEC were correct that the assets and services it identifies are within the scope of its existing regulatory authority, this [legal] action must be dismissed on independent grounds that it violates Coinbase's due process rights and constitutes an extraordinary abuse of process," the legal document reads.

Questioning the Scope of SEC’s Regulatory Power

The SEC's lawsuit accuses Coinbase of facilitating unregistered trading in 12 digital tokens that the commission considers securities. Coinbase, however, has fervently disputed this accusation, asserting that the SEC's application of securities laws to certain digital tokens considerably deviates from existing legal frameworks. Paul Grewal, Coinbase's chief legal officer, on June 29 expressed that the SEC's claims "go far beyond existing law" and should hence be dismissed.

Interpreting 'Securities': Howey Test and Crypto Tokens

The SEC's definition of security includes investment contracts, which, according to the Supreme Court’s Howey test, encompasses transactions where individuals invest money in a common enterprise and expect profits primarily from others' efforts. In its lawsuit, the SEC labeled 12 crypto tokens as securities, including Solana, Cardano, Polygon, The Sandbox, Flow (FLOW), Internet Computer, Near, and Dash.

The SEC's Greenlight to Coinbase: A Point of Contention

Coinbase’s attorneys have emphasized that in 2021, the SEC approved Coinbase's registration statement, enabling the company to sell its shares to investors during its public launch. This approval followed an extensive review process involving detailed discussions with Coinbase, ultimately permitting the crypto exchange to trade over 240 tokens on its spot exchange, including six of the 12 tokens currently under dispute.