Coinbase advocates for reevaluation of crypto as securities in legal clash with SEC

Coinbase’s legal team has approached U.S. District Judge Katherine Failla with a request to overlook a prior judgment that defined secondary sales of crypto assets as securities transactions.

The plea, part of Coinbase’s ongoing legal dispute with the U.S. Securities and Exchange Commission (SEC), was highlighted in a letter dated March 5.

Michael Savitt, representing Coinbase, contended that the SEC’s prior classification of crypto sales in the secondary market as securities contracts, particularly noted in the SEC vs Wahi case, lacks substantial grounding since it was never thoroughly vetted in court.

The backdrop of this legal entanglement traces to July 2022, when the SEC initiated a lawsuit against Ishan Wahi, a former Coinbase product manager, alongside his brother Nikhil Wahi and their friend Sameer Ramani. The lawsuit revolved around insider trading allegations tied to nine cryptocurrencies.

The Wahi defendants sought to dismiss the charges by arguing that the tokens in question did not constitute “investment contracts” and were, therefore, beyond the SEC’s reach. Coinbase, among others, submitted briefs in support of this dismissal.

However, before any resolution on the dismissal, the SEC reached a settlement with the Wahi brothers in June 2023, which was concluded as a “zero-dollar, no-admit-no-deny” agreement. Following this, the SEC secured a default judgment against Ramani, who failed to present his defense, thereby accepting the SEC’s stance that the involved crypto assets were “investment contracts.”

Coinbase’s attorney, Savitt, criticized this judgment against Ramani, arguing it was decided in absence of any substantive legal debate, hence it should not be considered a precedent. “The Wahi order was procured against an empty chair and its reasoning reflects as much,” Savitt stated, emphasizing the need to discount the default judgment in the current proceedings.

This legal maneuver by Coinbase came after the SEC, on March 4, attempted to leverage the outcome of the Wahi insider trading case to challenge Coinbase’s stance by highlighting that the tokens had been classified as securities in the court’s decision at that time.

The ongoing dialogue between Coinbase and the SEC includes debates over the application of the Howey test, a criteria stemming from a 1946 Supreme Court case, to determine if crypto assets traded on Coinbase’s platform are securities.

In June 2023, the SEC accused Coinbase of violating federal securities laws by listing 13 tokens it claimed were securities.

Coinbase is now seeking a judicial order to dismiss the SEC’s lawsuit, questioning the regulatory body’s oversight of crypto exchanges.

Despite Bitcoin being recognized as a commodity since 2015, the regulatory status of other cryptocurrencies remains ambiguous, presenting substantial challenges for centralized exchanges.

Under the leadership of Jay Clayton and Gary Gensler, the SEC has intensified its regulatory actions against crypto companies, alleging unregistered securities offerings or sales. With legislative progress on cryptocurrency regulation moving slowly, companies such as Ripple, Binance, and Coinbase find themselves increasingly scrutinized by the regulator.