A U.S. Federal Judge in Manhattan has ruled that the SEC's lawsuit against Coinbase, alleging operation as an unregistered securities broker and exchange, can proceed.
A federal judge in Manhattan ruled on Wednesday that the U.S. Securities and Exchange Commission's (SEC) lawsuit against Coinbase can move forward, while dismissing one of the agency's claims. The decision is a setback for Coinbase, which had sought to dismiss the lawsuit.
Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York found that the SEC presented a "plausible" case that Coinbase has been operating as an unregistered securities broker, exchange, and clearinghouse. However, the judge dismissed the SEC's allegation that Coinbase acted as an unregistered brokerage through its Coinbase Wallet service.
The SEC's suit, which also targeted fellow exchange Binance in the same week, alleges that Coinbase violated federal securities laws by offering trading and staking services to the public without proper registration. The agency's spokesperson stated, "We're pleased that yet another court has confirmed that, while the term 'crypto' may be relatively new, the framework that courts have used to identify securities for nearly 80 years still applies."
Judge Failla rejected Coinbase's arguments that the SEC was violating the Major Questions Doctrine or the Administrative Procedures Act, noting that Coinbase had received adequate notice of the SEC's enforcement intentions through the DAO Report and previous cases.
The judge also pointed to the nature of cryptocurrency transactions on Coinbase's platform, where customers are investing in the "digital ecosystem of tokens," which is intrinsically linked to the tokens' value. This includes initial coin offerings designed for resale value and the continued development of the tokens' blockchains by issuers.
While the lawsuit has overcome the initial hurdle of a motion to dismiss, mirroring the SEC's ongoing case against Ripple, the substantive arguments will be presented and debated at a later stage. These proceedings will take the allegations as facts for now.
If the court ultimately sides with the SEC and rules that exchanges must adhere to the same standards as national securities exchanges, it would mean new regulatory constraints and disclosure requirements for platforms like Coinbase. Moreover, it could restrict the variety of tokens that are accessible to retail investors.
Judge Failla has set an April 19 deadline for both parties to agree on a case scheduling plan.
