SEC Alleges Coinbase Knew It Was Violating Securities Laws

SEC Alleges Coinbase Knew It Was Violating Securities Laws – In response to a previous filing by Coinbase claiming that the SEC lacked jurisdiction to file a lawsuit, the SEC has pushed back, stating that Coinbase had previously acknowledged the potential applicability of federal securities laws to its listings. 

The SEC recently sued Coinbase, alleging that it had been operating as an unregistered broker, clearinghouse, and exchange, and had listed multiple unregistered securities in the form of at least 13 cryptocurrencies.  In its latest filing on Friday, the SEC expressed its opposition to any motion for judgment that Coinbase might file and requested the court to dismiss Coinbase’s arguments regarding the violation of the major questions doctrine and other concerns. 

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“Coinbase, a multi-billion-dollar entity advised by sophisticated legal counsel, argues it was unaware that its conduct risked violating the federal securities laws, and suggests that by approving Coinbase’s registration statement in 2021 the SEC confirmed the legality of Coinbase’s underlying business activities – at that time and for all time,” the SEC said in its filing.

However, the regulator continued, Coinbase had previously “adopted the very legal framework” enacted by the U.S. Supreme Court to determine whether certain cryptocurrencies met the requirements of federal securities laws, while “explicitly discouraging” crypto issuers from making any statements “traditionally associated with securities.”

Coinbase’s public filings also acknowledge that one potential risk for investors is the possibility of listed assets being classified as securities. “These actions clearly show that Coinbase understood that the securities laws could apply to its conduct and knew which rules to consider in evaluating the legality of its conduct, but nevertheless made the calculated decision to take on this risk in the name of growing its business,” the filing said.

The SEC also previewed its arguments pushing back against Coinbase’s proposed motion for judgment, saying the crypto exchange made two “equally flawed arguments.” Coinbase presented two initial arguments, the first being that an investment contract requires a formal contract, and the second stating that investment contracts are only applicable if they are traded on secondary markets. 

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The SEC countered by stating that the Howey Test does not necessitate a formal contract and that transactions on secondary markets can still be in violation of securities laws. To support this second argument, the SEC referred to its recent legal victory against LBRY as an illustrative example.  A hearing is currently scheduled for July 13 in the District Court for the Southern District of New York.

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