Coinbase challenges SEC in legal battle, pushing for reassessment of cryptocurrencies as securities

Coinbase’s legal team has made a request to U.S. District Judge Katherine Failla, asking her to reconsider a previous judgment that classified secondary sales of crypto assets as securities transactions. This request was made in a letter dated March 5 as part of Coinbase’s ongoing legal dispute with the U.S. Securities and Exchange Commission (SEC). Michael Savitt, who represents Coinbase, argued that the SEC’s classification of crypto sales in the secondary market as securities contracts, specifically mentioned in the SEC vs Wahi case, lacks a solid foundation as it was never thoroughly examined in court.

The origins of this legal dispute can be traced back to July 2022 when the SEC filed a lawsuit against Ishan Wahi, a former Coinbase product manager, his brother Nikhil Wahi, and their friend Sameer Ramani. The lawsuit centered around allegations of insider trading involving nine cryptocurrencies. The Wahi defendants attempted to have the charges dismissed by arguing that the tokens in question did not qualify as “investment contracts” and were therefore outside the SEC’s jurisdiction. Coinbase, along with others, supported this dismissal through briefs.

However, before any resolution on the dismissal could be reached, the SEC reached a settlement with the Wahi brothers in June 2023. The settlement was a “zero-dollar, no-admit-no-deny” agreement. Following this, the SEC obtained a default judgment against Ramani, who failed to present a defense, effectively accepting the SEC’s position that the involved crypto assets were “investment contracts.”

Coinbase’s attorney, Savitt, criticized this judgment against Ramani, arguing that it was made without any substantial legal debate and should not be considered as a precedent. Savitt stated that the judgment was obtained against an absent party and its reasoning should not carry weight in the current proceedings.

Coinbase’s move comes after the SEC, on March 4, attempted to use the outcome of the Wahi insider trading case to challenge Coinbase’s position. The SEC highlighted that the tokens had been classified as securities in the court’s decision at that time.

The ongoing dialogue between Coinbase and the SEC involves discussions on the application of the Howey test, a criteria derived from a 1946 Supreme Court case, to determine if the 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 that it claimed were securities. Coinbase is now seeking a court order to dismiss the SEC’s lawsuit, questioning the regulatory body’s oversight of crypto exchanges.

While Bitcoin has been recognized as a commodity since 2015, the regulatory status of other cryptocurrencies remains unclear, posing significant 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 slow progress on cryptocurrency regulation at the legislative level, companies like Ripple, Binance, and Coinbase are facing increased scrutiny from the regulator.