In a highly anticipated judgment with significant implications for the crypto industry’s legal battles against regulators in the United States, the court overseeing the Coinbase and US Securities and Exchange Commission (SEC) legal battle has delivered a ruling. 

The court found against the crypto firm, supporting the SEC’s claims that the platform operated as an exchange, broker, and clearing agency. However, the court also sided with the US-based exchange on certain SEC claims regarding its wallet. As a result, the case will proceed, marking a pivotal moment in the ongoing dispute.

Court Denies Coinbase’s Motion

The court’s decision stemmed from the SEC’s allegations that Coinbase facilitated transactions in crypto-asset securities without proper registration, violating Sections 5, 15(a), and 17A(b) of the Exchange Act. 

The SEC contended that Coinbase acted as a marketplace, bringing together buyers and sellers of “crypto-asset securities”, while also serving as a custodian of securities through its wallet system. In this regard, the court denied the exchange’s motion to dismiss Counts I, II, and III of the complaint, affirming the SEC’s claims.

Furthermore, the court found that Coinbase’s parent company, CGI, could be held liable as a control person of Coinbase under Section 20(a) of the Exchange Act. It determined that CGI exercised power and control over the crypto firm, managing and directing its operations, thus denying Coinbase’s motion to dismiss Count IV.

Mixed Ruling

Regarding the exchange’s Staking Program, the court agreed with the SEC’s argument that it constituted an investment contract under the Howey Test, making it subject to registration under the Securities Act. According to the ruling, the program allowed customers to stake various crypto assets, and the court found that Coinbase’s managerial efforts provided financial returns, meeting the definition of an investment contract. 

As a result, the court concluded that the SEC adequately alleged the exchange’s unregistered offer and sale of securities, denying Coinbase’s motion for judgment on the pleadings.

However, the court granted Coinbase’s motion concerning the SEC’s claims concerning its Wallet application. While the SEC alleged that the crypto firm conducted brokerage activity through Wallet, the court found the factual allegations insufficient to support the inference that the exchange acted as an unregistered broker.

Finally, both parties are directed to submit a proposed case management plan by the court on or before April 19, 2024. 

Commenting on the potential implications of this outcome, Edward Snowden wrote the following on his X account:

This doesn’t bother me. If the SEC keeps acting in bad faith like this, they’re going to lose so hard in court that they’ll never be able to do this to anyone ever again. Remember when the SEC got spanked so badly that Gensler had to approve BTC ETFs with tears in his eyes? yeah

Featured image from Shutterstock, chart from TradingView.com