A recent court ruling in the lawsuit between the United States Securities and Exchange Commission (SEC) and Coinbase Global Inc. (NASDAQ: COIN) marks a significant development, allowing the SEC’s claim of unregistered securities sales against the crypto exchange to proceed to a jury trial. Following the decision by a Manhattan federal judge on March 27, 2024, Coinbase experienced a decline of approximately 2.5% in its share price.
The SEC initiated legal action against the exchange in June, alleging that the entity operated as an unregistered exchange and broker. Additionally, the SEC sought to permanently restrain Coinbase from continuing these activities.
Judge Katherine Polk Failla, in her ruling, noted the applicability of traditional securities frameworks to the transactions under scrutiny despite the relatively recent emergence of cryptocurrencies. She stated that despite the novelty of the “crypto” terminology, the transactions in question align with established frameworks for identifying securities that have been in place for nearly eight decades.
Failla concluded that the SEC’s allegations regarding Coinbase Staking Program’s involvement in unregistered securities offerings were adequately supported. She rejected the SEC’s assertion, nevertheless, that Coinbase used its wallet application to conduct business as an unregistered broker.
Coinbase’s response to media inquiries on the ruling included statements by Paul Grewal, the company’s chief legal officer, who expressed readiness to delve deeper into the SEC’s perspectives and deliberations on cryptocurrency regulation.
In a parallel move, the SEC included notice of Failla’s ruling in the Coinbase case into a separate litigation that is currently underway in the District of Columbia federal court, this time involving Binance, another prominent crypto exchange. The SEC’s lawsuit against Binance alleges multiple instances of unregistered offerings and sales of cryptocurrency asset securities.
The current legal development unfolds amid Coinbase’s increasing significance in Wall Street’s embrace of digital assets. The SEC approved several U.S. Bitcoin spot exchange-traded funds (ETFs) at the beginning of the year, many of which selected the exchange as their custodial partner. The bitcoin spot ETFs have attracted substantial investments, collectively amassing around $52 billion since its launch in January.
The regulatory scrutiny on Coinbase and similar platforms intensified following comments by Gary Gensler, the SEC chair, last year. Gensler highlighted concerns regarding the multifaceted roles of platforms such as Coinbase, which he likened to exchanges but observed as engaging in various other functions. He drew a comparison to the New York Stock Exchange, emphasizing the distinction between exchange operations and other financial activities.
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