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(Kitco News) - Coinbase, the largest cryptocurrency exchange in the U.S., has filed a motion to dismiss the lawsuit filed by the Securities and Exchange Commission (SEC) against the exchange in June, saying the regulator violated due process.
“Two years ago, recognizing that the SEC wanted but lacked statutory power to regulate crypto exchanges, Chair Gary Gensler asked Congress for a legislative mandate,” the filing posted on Friday said. “None came. Now, without any intervening legislative act, the Commission accuses Coinbase of having ‘defied’ the federal securities laws in failing to register as a securities exchange, broker, and clearing agency since 2019.”
The lawsuit came despite the fact “that the SEC allowed Coinbase to go public in 2021 with the same business it operates now,” Coinbase said. They also noted that Congress advanced legislation “to grant and allocate among other regulatory agencies the very authority the SEC now claims for itself,” but said, “The SEC wanted to get the jump,” by filing the lawsuit before it had been granted the power to do so.
“In making that jump, the SEC has violated due process, abused its discretion, and abandoned its own earlier interpretations of the securities laws,” Coinbase said.
The motion to dismiss said, “The subject matter falls outside the agency’s delegated authority,” which “entitles Coinbase to judgment on the pleadings now.”
“The SEC may pursue this enforcement action only if relevant transactions in the digital assets and services identified in the Complaint are ‘investment contracts’ and therefore ‘securities’ under the Securities Act of 1933 and the Securities Exchange Act of 1934,” they said. “Because as a matter of law none of them are, the claims must be dismissed.”
Coinbase noted that a key feature of an “investment contract,” as defined by the Supreme Court ruling in the Howey case, “is that it at least purport to grant the purchaser a contractual right to the profits, income, or assets of a business enterprise.”
“The SEC does not and cannot allege that transactions in the 12 tokens identified in the Complaint that take place on Coinbase’s secondary market spot exchange, or on other secondary market exchanges through Coinbase Prime, carry such rights,” the filing said. “They are asset sales, with the obligations of buyer and seller discharged at the point of sale.”
To back up this point, the legal team cited precedent from the SEC v. Ripple case, in which a judge ruled that XRP largely did not qualify as a security by the commission’s existing standards.
For those that disagree with this assessment, Coinbase said, “The major questions doctrine would require dismissal in deference to Congress’s prerogative to decide how to establish and allocate authority over the digital asset arena.”
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The exchange also pushed back against allegations that it operates “as a ‘broker’ of investment contracts by making Wallet software available to users.”
“The token that the SEC says customers can self-custody using Wallet, NEXO, is not alleged to carry any more rights to a share in any enterprise than the other 12 tokens identified,” they said. “Even were it otherwise, the Complaint pleads nothing to suggest that Coinbase functions as a ‘broker’ under the securities laws by making available to users free software allowing them to store and access their own digital assets on their own computers or devices.”
In regards to the charges referencing the platform’s staking-as-a-service program, Coinbase said, “The facts pleaded and incorporated by reference establish that staking service customers make no investment of money by staking through Coinbase’s software, and staking customers receive ministerial as opposed to managerial services from Coinbase.”
Based on these statements, Coinbase has requested the court dismiss the case, arguing the SEC’s enforcement action was “punitive” and represented an overreach in its authority granted by Congress.
Paul Grewal, chief legal officer at Coinbase, announced the motion to dismiss on X.com, formerly known as Twitter, saying their core argument is simple: “We do not offer ‘investment contracts’ as that term has been construed by decades of Supreme Court and other binding precedent.”
“By ignoring that precedent, the SEC has violated due process, abused its discretion, and abandoned its own earlier interpretations of the securities laws,” Grewal added. “By ignoring that precedent, the SEC has trampled the strict boundaries on its basic authority set by Congress. We appreciate the Court's careful consideration.”
