Why Coinbase Thinks the SEC Lawsuit Should Be Dismissed

By Nivesh Rustgi

Crypto exchange Coinbase has filed a motion to dismiss the Securities and Exchange Commission's (SEC) case against it for violating securities laws and operating as an unregistered entity.

In its filing, Coinbase argues that the SEC does not have statutory authority over the exchange, and that its position regarding its powers is “untenable as a matter of law.” The exchange filed the 177-page, 11-point defense motion on June 28.

Paul Grewal, the Chief Legal Officer at Coinbase, tweeted this morning that “claims in this [SEC’s] case go far beyond existing law – and should be dismissed.”

Tokens not 'investment contracts,' says Coinbase

Coinbase's primary argument against the SEC is that the regulator does not have "regulatory authority" in the case for various reasons.

The first is that the 12 tokens regarded as securities in SEC's complaint are not "investment contracts," which is necessary for deeming assets securities.

According to Coinbase's legal team, without a "contractual undertaking" to generate profits or a business whose "management owes enforceable obligations to investors," it's just an "asset sale" and cannot be considered an "investment contract."

The motion mentioned the utility of tokens regarded as security, arguing that they are not.

It added that The Sandbox (SAND), Filecoin (FIL), Cardano (ADA), Solana (SOL), Flow (Flow), and Polygon (MATIC) tokens are used for paying transaction fees or for other services offered on their respective platforms in their respective decentralized ecosystems.

The exchange argued that even if the SEC has jurisdiction it should have introduced a formal change to its interpretation of “investment contract.”

The motion also used the Equitable estoppel defense doctrine, citing previous instances where the SEC's actions and statements contradicted its latest lawsuit against Coinbase. Equitable estoppel is a legal doctrine that can be raised as a defense if previous conduct or statements led another party to rely on those actions reasonably.

The exchange mentioned that the SEC gave the exchange the green light during the six-month verification process for listing Coinbase's shares on the U.S. stock market in April 2021.

Coinbase's motion also read that "six of these 12 assets were already on Coinbase when the SEC declared the Company's registration statement effective.”

The motion also argued that the SEC was aware of the exchange’s listing processes for tokens, and raised no objections before bringing the lawsuit.

The SEC's "about-face"

Coinbase demands that the unexpected "about-face" in the regulator's stance toward the end of 2022 from that which it held earlier should bar it from seeking legal remedies.

In May 2021, SEC Chairman Gary Gensler testified before the U.S. Congress that "only Congress" can address the gap in regulating cryptocurrencies as "there is not a market regulator around these crypto exchanges." However, by the end of 2022, Gensler had decided that the SEC has "enough authority" to bring enforcement.

In its filing, Coinbase retorted that, “no statute enacted since April 2021 gives the SEC any powers to regulate digital asset exchanges, much less retroactively.”

Coinbase argued that the exchange has been pushing for rulemaking, which the SEC rejected recently, and has also filed public petitions against the government agency. The exchange argues that the SEC has ignored those requests, instead engaging in “punitive enforcement actions rather than by notice-and-comment rulemaking.”

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