SEC scores big win in lawsuit against crypto exchange Coinbase

A smartphone with displayed Coinbase logo and representation of cryptocurrencies are placed on a keyboard in this illustration taken, June 8, 2023.

Dado Ruvic | Reuters

The Securities and Exchange Commission scored a major win in its lawsuit against Coinbase on Wednesday, as a judge ruled that its claim that the cryptocurrency exchange engaged in unregistered sales of securities could be heard by a jury at trial.

Coinbase’s shares fell around 2.5% on news of the ruling in Manhattan federal court rejecting its bid to dismiss the SEC’s complaint.

The regulator first filed suit against Coinbase in June, alleging the company was acting as an unregistered broker and exchange. The agency also demanded the company be “permanently restrained and enjoined” from continuing to do so.

In her ruling Wednesday, U.S. District Judge Katherine Polk Failla wrote, “The ‘crypto’ nomenclature may be of recent vintage, but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years.”

“The Court finds that the SEC adequately alleges that Coinbase, through its Staking Program, engaged in the unregistered offer and sale of securities,” Failla wrote.

The judge elsewhere in that ruling agreed to dismiss the SEC’s claim in the lawsuit that Coinbase acted as an unregistered broker by making its Wallet application available to customers.

The company responded to CNBC’s request for comment with a link to a series of posts on social media platform X by Coinbase’s chief legal officer, Paul Grewal.

“We were prepared for this, and we look forward to uncovering more about the SEC’s internal views and discussions on crypto regulation,” Grewal wrote.

The SEC later Wednesday filed a notice of Failla’s decision in the Coinbase case on the docket of a lawsuit it has pending in federal court in the District of Columbia against Binance, another major cryptocurrency exchange. The SEC in that suit accuses Binance of making multiple unregistered offers and sales of crypto asset securities.

Wednesday’s decision news comes as Coinbase takes on a bigger role in Wall Street’s adoption of cryptocurrency.

In January, the SEC approved a raft of U.S. spot bitcoin exchange-traded funds. Many of these ETFs have partnered with Coinbase as their custody partner.

These U.S. spot funds have seen record flows since launching in January. Collectively, they have brought in around $52 billion.

In June, SEC Chair Gary Gensler said on CNBC that trading platforms like Coinbase “call themselves exchanges” but were “commingling a number of functions.”

“We don’t see the New York Stock Exchange operating a hedge fund,” Gensler said at the time. 

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