Coinbase, a16z Take SEC to Court Over 'Unlawful' Crypto Overreach

A consortium of crypto industry juggernauts is suing the U.S. Securities and Exchange Commission (SEC) in Texas, in response to years of what it calls “erroneous SEC enforcement actions.”

The Texas lawsuit, led by the Crypto Freedom Alliance of Texas (CFAT) and Fort Worth, Texas-based startup crypto exchange Lejilex, demands judicial clarity over whether the SEC has regulatory authority over most digital asset transactions within the state. The plaintiffs assert the SEC does not have such authority, despite the agency’s frequent claims to the contrary.

“The SEC’s unlawful, unpredictable approach has created an environment in which companies like Lejilex are unable to operate without fear of being subject to SEC enforcement actions,” CFAT said in a Wednesday press release.

CFAT is comprised of several crypto industry leaders, including Coinbase, Andreessen Horowitz's a16z Crypto division, Ledger, Paradigm, and Blockchain Capital. Coinbase is already juggling its own lawsuit with the SEC for failing to register as a securities exchange despite allegedly listing several securities on its platform.

The CFAT lawsuit in Texas tackles the same subject, but instead takes a preemptive, state-level legal fight to the SEC.

"This is the first time that I am aware of that a crypto industry participant is proactively seeking a declaration that secondary market sales are not securities transactions, and that the digital asset trading platform need not register with the SEC," said Amanda Tuminelli, Chief Legal Officer at DeFi Education Fund, in a message to Decrypt.

"It is a similar principle to what Coinbase is arguing in federal court in NY, but Lejilex is a centralized, non-custodial exchange," she added.

Bitcoin ETFs ‘Not in Any Way an Approval of Bitcoin’: SEC Chair Gensler

During a Wednesday morning interview with CNBC, SEC Chair Gary Gensler again reiterated that the approval of Bitcoin ETF in January was not an endorsement of the digital asset itself. Last month, the U.S. Securities and Exchange Commission approved nearly a dozen spot Bitcoin ETFs. While the crypto faithful saw this as capitulation, Gensler said this was not the case. “We've had similar products, in gold and silver, ETFs they're technically Exchange Traded Products (ETP). We approve a group of a...

CFAT's arguments mirror those of Coinbase, claiming the SEC’s interpretation of “investment contracts” under the Howey Test is overly broad, and would make securities sales out of transactions that are obviously nothing of the sort.

To illustrate its position, CFAT raises the example of the purchase of limited edition Nike running shoes, where someone buys them with the intention of reselling later at a higher price while expecting continued marketing efforts from Nike.

Under the SEC’s terms, CFAT said, the sneakers could technically be classified as “securities,” their resales as “securities transactions,” and auction houses reselling the shoes as “unregistered securities exchanges.”

“We wish we were launching our business instead of filing a lawsuit, but here we are,” said Lejilex co-founder Mike Wawszczak in a statement. “Fear of rogue enforcement should not be a thing entrepreneurs are forced to experience.”

Will Coinbase Win Dismissal of SEC Lawsuit? Legal Experts Weigh In

Coinbase could be poised for a win in its legal battle against federal regulators after just one hearing in court this week, according to legal experts familiar with the case. On Friday, Bloomberg’s Senior Litigation Analyst Elliot Z. Stein tweeted that after hearing Coinbase's oral arguments on Wednesday, he gives the crypto exchange a 70% likelihood of securing victory in its motion to dismiss all claims made against it by the U.S. Securities and Exchange Commission (SEC). “Coinbase is likely...

The SEC has faced widespread criticism of its treatment of the crypto industry, including from Congress and even within its own ranks.

Over the last year, however, the agency’s legal cases against crypto firms Ripple and Grayscale both collapsed, and analysts have grown optimistic that its charges against Coinbase could be outright dismissed.

That said, University of Kentucky law professor Brian L. Frye isn't so confident in either Coinbase or CFAT's legal arguments.

"This lawsuit is interesting, but in my opinion a long shot," Frye told Decrypt. "I think the effort to devise a bright-line test distinguishing securities from non-securities was the right tactical move, but I also think their test may be more restrictive on the SEC than the courts will accept."

SEC Crypto Unit Leader Resigns After Spearheading Coinbase Lawsuit

One of the U.S. government’s most combative anti-crypto lawyers has resigned from her post to take a job in the private sector. Ladan Stewart was a leader in the Crypto Assets and Cyber Unit of the Securities and Exchange Commission (SEC). She is now joining the international law firm White & Case, where she will help build its crypto and cyber defense practice. “Crypto is here to stay—that’s become very clear with the launch of a slew of Bitcoin exchange-traded funds,” Steward told Bloomberg La...

The SEC's Howey Test defines an investment contract as investments of money in a common enterprise with the expectation of profit from the efforts of others. As Frye explained, CFAT attempts to argue that most cryptocurrencies do not give holders a direct stake in a "common enterprise," and should therefore fail the test.

"Clever, but I don’t think that will fly," said Frye. "The same is true of most (almost all!) stockholders."

On Wednesday, one of the SEC crypto units’ top lawyers was confirmed to have left the agency in favor of a private sector role in which she could possibly begin supporting the crypto industry.

Edited by Andrew Hayward