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(Kitco News) - Coinbase, the largest cryptocurrency exchange in the U.S., has filed a new motion to dismiss the lawsuit filed against the exchange by the Securities and Exchange Commission (SEC), saying that the agency had exceeded its legal authority.
The SEC lawsuit, which was filed on June 6, alleged that Coinbase facilitated unregistered trading in 12 digital tokens that are deemed securities. The tokens in question include Solana, Cardano, Polygon, Filecoin, The Sandbox, Axie Infinity, Chiliz, Flow, Internet Computer, Near, Voyager Token, and Dash.
According to the legal document filed on Thursday with the U.S. District Court for the Southern District of New York, Coinbase said the agency has exceeded its regulatory purview in recent enforcement actions while simultaneously ignoring calls for it to provide greater regulatory clarity.
“In the past year in particular the SEC has dramatically expanded its definition of investment contract and, therefore, its own authority to regulate digital assets,” Coinbase argued. “It has done so by decree, arbitrarily, and without congressional mandate.”
The motion cited the SEC’s approval of Coinbase Global’s registration statement, which allowed shares of its stock (COIN) to be sold to retail and institutional investors and included a thorough examination of its business operations.
“That declaration followed years of discussions with Coinbase and a months-long process of extensive review and comment on Coinbase’s registration statement,” the motion said. “Coinbase had opened its business to the SEC, explaining its listing of digital assets, provision of trading and staking services, and self-custody wallet software — core aspects of Coinbase’s operations, then as now. The SEC, fulfilling its mandate to consider ‘the public interest and the protection of investors,’ permitted Coinbase’s public offering without once suggesting that Coinbase must register its operations.”
Then, after two years, the SEC filed its lawsuit claiming that beginning in 2019, Coinbase failed to register as a national securities exchange, broker, and clearing agency.
“The Commission grounds its suit in allegations that 12 of the more than 240 tokens traded on Coinbase’s spot exchange are ‘securities,’” Coinbase said. “Six of these 12 assets were already on Coinbase when the SEC declared the Company’s registration statement effective. The SEC called none of them securities in 2021.”
The crux of Coinbase’s defense is that the SEC lacks regulatory authority over cryptocurrency exchanges, and only an act of Congress will change that.
“Congress has considered and continues to actively consider multiple regulatory proposals governing digital assets – but no statute enacted since April 2021 gives the SEC any powers to regulate digital asset exchanges, much less retroactively,” the exchange said. “The only change is in the SEC’s position regarding its powers. That position is untenable as a matter of law, and its assertion through this enforcement action offends due process and the constitutional separation of powers.”
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| Moody's downgrades Coinbase, warns SEC lawsuit could have a significant impact |
During a May 2021 hearing in front of Congress, SEC Chair Gary Gensler testified that the Commission lacked statutory authority to regulate businesses like Coinbase, saying “only Congress” could address the regulatory gap that Commission officials had long recognized, “because right now the exchanges trading in these crypto-assets do not have a regulatory framework.” He added, “There is not a market regulator around these crypto exchanges.”
“Yet by the end of 2022, nothing having changed except the SEC’s position, Chair Gensler was proclaiming, ‘I feel that we have enough authority, I really do, in this space’ to require crypto companies to register as national securities exchanges,” Coinbase said. “As evidenced by this lawsuit, the SEC also now asserts the authority to extract punitive retroactive penalties from companies for failure to recognize powers its own Chair was disclaiming two years ago.”
Based on these observations, Coinbase has called for the SEC’s lawsuit to be dismissed on account of the regulator exceeding its statutory authority and violating due process.
“Even if the SEC were correct that the assets and services it identifies are within the scope of its existing regulatory authority, this [legal] action must be dismissed on independent grounds that it violates Coinbase’s due process rights and constitutes an extraordinary abuse of process,” the filing said.
