Coinbase, the largest cryptocurrency exchange in the U.S., has filed a motion urging the District Court for the Southern District of New York to dismiss the U.S. Securities and Exchange Commission's lawsuit against the company. Paul Grewal, Coinbase's chief legal officer, said the SEC has ignored the legal definition of "investment contracts" and abused its authority.
"Today, Coinbase filed our brief asking the court to dismiss the SEC’s case against us," Grewal wrote in an Aug. 4 post on X, formerly known as Twitter. "Our core argument is simple — we do not offer 'investment contracts' as that term has been construed by decades of Supreme Court and other binding precedent."
Coinbase filed a motion Aug. 4 asking the court to dismiss the SEC's claims on the grounds that the "subject matter" of the lawsuit "falls outside the agency’s delegated authority," according to a the motion. The motion's preliminary statement asserts the SEC and its chair, Gary Gensler, "wanted to get the jump" on regulating the digital asset industry despite the absence of a "legislative mandate" from Congress to do so.
"Now, without any intervening legislative act, the Commission accuses Coinbase — the largest U.S. crypto exchange — of having 'defied' the federal securities laws in failing to register as a securities exchange, broker and clearing agency since 2019," the motion reported. "No matter that the SEC allowed Coinbase to go public in 2021 with the same business it operates now. No matter that Congress has for years been actively considering — and just last week advancing — legislation to grant and allocate among other regulatory agencies the very authority the SEC now claims for itself."
Coinbase argues the SEC's enforcement action is only warranted if digital assets are securities, which must include an "investment contract." Coinbase said "as a matter of law," the digital assets identified in the SEC's complaint are not securities, and therefore "the claims must be dismissed." The motion goes on to argue Coinbase does not operate as an investment contract "broker" and to refute the SEC's claim that Coinbase's "staking" services constitute investment contracts.
Last month, Judge Analisa Torres, of the Southern District of New York, ruled in a separate case that the digital token XRP does not constitute an investment contract when sold to members of the public, as previously reported by Federal Newswire. The SEC had accused the company Ripple of violating securities laws by offering XRP.
Stuart Alderoty, Ripple's chief legal officer, said Torres's ruling could apply to other crypto exchanges facing enforcement actions from the SEC, including Coinbase, as well as Binance, the largest crypto exchange in the world, Federal Newswire reported.
"The core allegation...both in the Coinbase lawsuit and in the Binance lawsuit — that an exchange trading a digital token would therefore need to register as a national security exchange — that was repudiated by this judge in our case," Alderoty said in a July 25 episode of TechCrunch's Chain Reaction podcast. "We have a clear statement that the trading of a digital token — in this case XRP, but I think you can analogize to other tokens...that does not make a contract for an investment, and therefore there's no security, and therefore there's no role for the SEC to play. I think that ruling will play well in the Coinbase case, and it should play equally well on that claim in the Binance case."
"By ignoring that precedent, the SEC has violated due process, abused its discretion and abandoned its own earlier interpretations of the securities laws," Grewal added, according to his X post. "By ignoring that precedent, the SEC has trampled the strict boundaries on its basic authority set by Congress."
