Coinbase Seeks Dismissal of the SEC’s Legal Case Based on the Definition of a Security

Coinbase has asked a court to dismiss a high-profile lawsuit by the Securities and Exchange Commission (SEC). Earlier this month, the SEC came out with charges that the world’s second-biggest crypto exchange had failed to properly register its business. 

The SEC’s case rests on the claim that Coinbase’s token and staking services are securities. However, Coinbase argues they are not, criticizing what it calls the “fundamental problem” with this case. If it is dismissed, the potential ramifications for the industry are hard to calculate.

Coinbase Argues It Doesn’t Trade in Securities

As reported in Bloomberg and elsewhere on Thursday, a court filing from the law firm Wachtell Lipton Rosen & Katz on behalf of the exchange argues that the assets in question do not fall under SEC jurisdiction. It continues:

“The SEC may pursue this enforcement action only if relevant transactions in the digital assets and services identified in the Complaint are properly considered ‘investment contracts’ and therefore ‘securities’ within the meaning of the Securities Act of 1933 (the ‘Securities Act’) and the Securities Exchange Act of 1934 (the ‘Exchange Act’). Because as a matter of law none of them are, the claims must be dismissed.”

The exchange also pointed out that senior SEC officials have previously stated that Bitcoin and Ether, which are available to trade on Coinbase, are not securities. Even so, in its actions against the two exchanges, the regulator identified several tokens as fitting the definition earlier this month.

Key to Coinbase’s claim that it does not trade in securities is the definition itself. Its lawyers argue that the absence of an ongoing contractual relationship is fatal to the SEC’s claim. They contend that the tokens available for trading on the platform differ from typical securities. The latter involve investors paying money for a promise of future profits or income.

SEC Actions Rocked the Industry

The SEC’s action against Coinbase came one day after the filing of similar charges against its largest competitor, Binance. The two back-to-back actions against two of the industry’s biggest firms made waves. Coinbase, one of the few publicly traded companies in the industry, saw its stock nosedive by 18% following the news.

Recently, the company has been pivoting away from its base in the United States. This week, the exchange praised the work of Canadian lawmakers in trying to make the country an attractive destination for digital assets businesses.