Coinbase's Defense: Tokens Are Not Investment Contracts

Coinbase Seeks Dismissal of SEC Lawsuit Over Unregistered Securities


Cryptocurrency exchange Coinbase has filed papers in a New York federal court requesting the dismissal of the Securities and Exchange Commission's (SEC) lawsuit, which accuses the company of offering unregistered securities. Coinbase argues that the tokens it lists for trading are not "investment contracts," and therefore, the SEC lacks jurisdiction to regulate them. The company draws a parallel to a famous Supreme Court case, arguing that the investment contract would have occurred between the token creators and the initial buyers. Coinbase emphasizes that it has a rigorous vetting process, with over 90% of tokens ineligible for sale. The company also invokes the theory that tokens can cease to be securities as the blockchains hosting them become more decentralized. Coinbase's position is untested in U.S. courts, as the law around cryptocurrency is still evolving.

By seeking the dismissal, Coinbase aims to fend off an existential threat not only to itself but also to other U.S. crypto companies. However, winning the motion at this stage is challenging, and the case is more likely to be decided at the summary judgment stage in 2024. The outcome of this highly watched legal battle will have significant implications for the regulation of cryptocurrencies and the crypto industry as a whole.

The Battle for Legal Clarity: Coinbase's Argument and Implications for the Crypto Industry


Cryptocurrency exchange Coinbase has taken a significant step in its legal battle against the Securities and Exchange Commission (SEC) by filing for the dismissal of the agency's lawsuit. The SEC had accused Coinbase of offering unregistered securities in the form of tokens listed for trading on its platform. Coinbase argues that these tokens do not qualify as "investment contracts" and, therefore, the SEC lacks the jurisdiction to regulate them. The company draws a comparison to the famous Supreme Court case, SEC v. W.J. Howey Co., where the court established the criteria for determining an investment contract. Coinbase contends that any potential investment contract would have occurred between the token creators and the initial buyers, rather than the company itself.

Coinbase's stance is that the tokens it lists are considered assets rather than investment tokens, as buyers and sellers are not tied to any contractual obligation. The company emphasizes its rigorous vetting process, which makes more than 90% of tokens ineligible for sale. In its legal filings, Coinbase also invokes a theory proposed by a former senior SEC official that tokens, once considered securities, can lose that status as the blockchains hosting them become more decentralized. However, Coinbase's argument regarding the status of listed tokens as assets rather than investment contracts has not been tested in U.S. courts, given that cryptocurrency law is still evolving.

To support its case for dismissal, Coinbase relies on SEC Chairman Gary Gensler's prior public comments suggesting that the agency lacked authority to regulate crypto before 2021. Additionally, Coinbase points out the SEC's own acknowledgment of a "regulatory gap" in the cryptocurrency field. The company also leverages the "fair notice defense," based on the concept that governments cannot initiate prosecutions if they have failed to inform individuals about relevant laws.

This legal battle holds significant implications not only for Coinbase but also for the broader U.S. crypto industry. By seeking dismissal of the lawsuit, Coinbase hopes to protect itself and other crypto companies from an existential threat. However, winning the dismissal motion at this stage is challenging, and it is more likely that the case will be decided at the summary judgment stage in 2024, where both parties present arguments based on a full body of evidence.

The outcome of this closely watched legal battle will play a crucial role in shaping the future regulation of cryptocurrencies. As the law surrounding crypto is relatively new and constantly evolving, this case will serve as a precedent for the industry and provide clarity on the SEC's jurisdiction over digital assets.

Summing it up


In its bid to dismiss the Securities and Exchange Commission's lawsuit, Coinbase has presented a strong argument asserting that the tokens it lists are not investment contracts and therefore fall outside the SEC's jurisdiction. The company highlights its stringent vetting process, which disqualifies over 90% of tokens from sale, and invokes the theory that tokens can cease to be securities as their associated blockchains become more decentralized. However, the outcome of this closely watched legal battle remains uncertain given the evolving nature of cryptocurrency law and the high burden to secure a dismissal at this stage. It is more likely that the case will be decided at the summary judgment stage in 2024, where both parties will present comprehensive evidence for their arguments.

The implications of this case extend beyond Coinbase itself, as it poses an existential threat not only to the company but also to other U.S. crypto entities. The court's ruling will have significant ramifications for the regulation of cryptocurrencies and the wider crypto industry. Coinbase's attempt to establish the non-investment nature of the tokens it trades has yet to be tested in U.S. courts, adding an additional layer of uncertainty to the proceedings. With the company relying on SEC Chairman Gary Gensler's prior comments and the agency's own admission of a regulatory gap, the outcome of this legal battle will serve as a precedent and offer much-needed clarity on the SEC's authority over digital assets.

As the cryptocurrency landscape continues to evolve, this case will shape the future regulation and functioning of the industry, impacting how exchanges and other crypto companies operate within the legal framework. The eyes of the crypto community and industry observers will watch eagerly as the legal battle plays out, eagerly anticipating the resolution and its potential implications for the future of cryptocurrencies and businesses in the United States.


Originally Published at: https://fortune.com/crypto/2023/06/29/coinbase-sec-motion-to-dismiss/
Business Topic: Regulators