District Court Says SEC Case Against Coinbase Can Proceed

The U.S. District Court for the Southern District of New York denied Coinbase's Motion for Judgment on the Pleadings in the SEC's case against the exchange, allowing the SEC to proceed with its lawsuit. The SEC alleged that Coinbase operates as an unregistered exchange, broker and clearing agency.

For the SEC to prevail, it is required to demonstrate that at least one of the assets that trades on Coinbase is a "security" under the Howey test and that Coinbase engages in the activities of an exchange, a broker or a clearing agency. In the Order, U.S. District Judge Katherine Failla agreed with the SEC that some of the assets traded on Coinbase could be securities under Howey, and rejected Coinbase's argument that a crypto asset traded in the secondary market could not be a security because the purchaser of the asset did not have any direct contractual claim against the issuer of the asset. The Court said that, rather than looking only to the existence of a contract between the issuer and a buyer in the secondary market, the SEC must consider the "expectations and understandings" of the parties, also referred to as the "ecosystem."

Having determined that the assets that were traded on Coinbase might be securities, the Court stated that the SEC's pleadings were sufficient to allow the SEC to move forward with the suit alleging that Coinbase should be registered with the SEC as an exchange, broker or clearing agency. The Court also concluded for the purposes of the Motion, that Coinbase's "staking" program might be found to constitute the issuance of a security.

The Court dismissed the SEC's claim that Coinbase's "Wallet" infrastructure service was acting as a broker, finding that the SEC did not demonstrate that the services provided by the Coinbase Wallet in connection with the trading of the digital assets were substantial enough to constitute brokerage.

The Court ordered the parties to submit a proposed case management plan by April 19, 2024.