In a major setback for Coinbase Inc. (NASDAQ: COIN), a U.S. court on Wednesday ruled against the cryptocurrency exchange on most aspects of its motion to dismiss an SEC lawsuit.
SEC Alleges Unregistered Securities Activity
The SEC filed a lawsuit against Coinbase in June 2023, accusing the exchange of operating as an unregistered securities dealer in two key areas: its core exchange functionality and its staking program.
The SEC argued that Coinbase facilitates the trading of assets that qualify as securities under federal law, but without registering as a broker-dealer.
Additionally, the SEC alleged that Coinbase's staking program, which allows users to earn rewards by holding certain cryptocurrencies, constitutes the unregistered offer and sale of securities.
Coinbase Fights Back, Denies Security Classification
Coinbase responded by filing a motion to dismiss the lawsuit, arguing that the SEC was exceeding its authority.
The exchange contended that the assets it facilitates trading are not securities under the law and that its staking program does not involve the sale of any investment contracts.
Judge Sides With SEC On Exchange And Staking Activities
Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York ruled against the exchange on most aspects of its motion to dismiss.
The court order states that the SEC has "plausibly alleged" that Coinbase operates as an exchange, broker, and clearing agency under federal securities laws.
This suggests the judge believes the SEC has presented enough evidence to move forward with its case on these points.
Staking Program Deemed Unregistered Security Offering
Furthermore, the court found that the SEC had adequately argued that Coinbase's staking program involves the unregistered offer and sale of securities.
This could have significant consequences for Coinbase and other cryptocurrency exchanges offering similar staking services.
Coinbase Secures Minor Victory On Wallet Claims
However, the court did grant Coinbase's motion to dismiss the SEC's claims regarding its digital asset wallet service.
This suggests that the judge may not consider the wallet service itself to be directly involved in the alleged securities offering.
Responding to the court's verdict, Coinbase's Chief Legal Officer Paul Grewal said, the exchange was prepared for this and that they will uncover more about the SEC's internal views and discussions on crypto regulation.
"While we continue this process, and any necessary appeals, we encourage Congress to build on the momentum we saw last year to advance comprehensive digital assets legislation in the US. This is critical if we want innovation to remain in the US," he added.
The implications of this court ruling and the ongoing legal battle between Coinbase and the SEC are expected to be hot topics at the Benzinga's upcoming Future of Digital Assets event on Nov. 19.
The event will likely explore the intersection of cryptocurrency and regulation, providing insights into how recent developments could shape the future landscape of digital assets.