SEC Asserts Coinbase Knew Of Its Legal Risks Before Lawsuit

The U.S. Securities and Exchange Commission (SEC) has responded to Coinbase’s claims that the regulatory body doesn’t have adequate jurisdiction to sue the cryptocurrency platform. The SEC highlighted Coinbase’s prior acceptance of potential applicability of federal securities laws to its operations in a document filed on Friday.

SEC’s Stand Against Coinbase’s Assertions

Last month, the SEC lodged a lawsuit against Coinbase, claiming it was functioning as an unregistered broker and exchange. According to the regulator, Coinbase had enlisted at least 13 cryptocurrencies that are unregistered securities. The SEC’s recent response emphasises that it will counter any judgment motion filed by Coinbase and urges the court to dismiss Coinbase’s claims that the lawsuit infringes upon the major questions doctrine and other issues.

In the filing, the SEC argues, “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.”

However, the SEC contends that Coinbase had adopted a legal framework set by the U.S. Supreme Court to gauge whether certain cryptocurrencies meet federal securities laws’ criteria. Additionally, Coinbase discouraged crypto issuers from making traditional securities-associated statements.

Coinbase’s Calculated Risk

According to the SEC, Coinbase’s public filings hint at possible risks to its investors due to the possibility of listed assets being deemed securities. The filing further states, “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 SEC also deconstructed Coinbase’s planned judgment motion, describing its two key arguments as “equally flawed.” Coinbase posited that an investment contract needs a formal contract and asset sales can only be investment contracts if traded on secondary markets. The SEC rebutted, clarifying that the Howey Test doesn’t require a formal contract and transactions on secondary markets could still infringe upon securities laws.

The SEC’s recent legal victory against LBRY was cited as an example to support its stance. Furthermore, the SEC contested Coinbase’s major questions doctrine argument, saying the case pertains to the SEC’s authority to enforce statutory requirements.

The District Court for the Southern District of New York is set to hear the case on July 13.