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  • J Huang and S Pettigrove

Coinbase to seek SEC discovery

In the latest development in the US Securities and Exchange Commission (SEC) v Coinbase, a US federal judge has allowed the SEC's enforcement action against Coinbase (COIN.O) to move forward, but dismissed allegations by the US regulator relating to Coinbase's self custodial wallet product, Coinbase Wallet.

The SEC sued Coinbase in June 2023, alleging Coinbase breached US securities laws in "operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency".

Coinbase filed a motion to dismiss the lawsuit in August 2023, on the basis that none of the 12 tokens cited in the SEC’s complaint are unregistered securities. Coinbase asserted during oral arguments in January that the four Coinbase services cited in the SEC’s complaint—general token sales, Coinbase Prime for institutional customers, the Coinbase Wallet, and the exchange’s staking service—were all outside the SEC’s purview.

In determining dueling summary judgment applications, US District Judge Katherine Polk Failla sided with Coinbase's arguments in relation to its wallet services, while permitting the SEC allegations in respect of the remaining products to move forward.

Coinbase Chief Legal Officer Paul Grewal commented on X that the result was not unexpected, as

Early motions like ours against a government agency are almost always denied

Coinbase intends to use the court's discovery process to gain insight into the SEC's evolving regulatory approach on crypto:

Grewal also encouraged Congress to build on momentum from last year to advance comprehensive digital assets legislation, which he said is critical for innovation to remain in the US.

Coinbase has long been seeking regulatory clarity from the SEC, even before this dispute. Coinbase's efforts include filing a petition requesting the SEC to exercise its rule making powers to establish a clear regulatory regime for crypto-assets, and later suing the SEC for failure to respond to the petition, which led to the SEC being ordered by court to explain its failure to respond. That dispute looks set to return to the Courts with Coinbase challenging the SEC's failure to exercise its rule making powers in respect of cryptocurrencies as "arbitrary and capricious".

While the SEC appears to have scored an early victory in its litigation against Coinbase, the proceedings remain at a preliminary stage and, as we have seen in the Ripple litigation, there are likely to be several more twists and turns as Coinbase battles the SEC's claims on its own behalf and, in many ways, on behalf of the industry as a whole.

Written by J Huang, S Pettigrove and M Bacina


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