Coinbase Battles SEC in Lawsuit Over Crypto Regulations, Asserting Digital Assets Aren't Securities

Attorney and XRP supporter John Deaton has expressed optimism that Coinbase will prevail in its lawsuit against the U.S. Securities and Exchange Commission (SEC). Deaton shared his thoughts with his 262,100 Twitter followers, stating that the US crypto exchange would likely emerge victorious in the lawsuit that seeks to compel the SEC to disclose its decision on a petition filed by Coinbase in 2022.

In an ongoing dispute, Coinbase has accused the SEC of making decisions about alleged legal violations "on the fly." The San Francisco-based crypto exchange has been defending itself against a Wells Notice, a formal warning from the SEC that indicates the Enforcement Division has found sufficient evidence of potential lawbreaking, which may lead to a lawsuit against the company. Coinbase's primary argument is that the cryptocurrencies listed on its platform are not securities, a stance that starkly contrasts with the repeated claims of SEC Chair Gary Gensler, who believes that the majority of digital assets meet the criteria of a security under federal law.

The SEC has warned Coinbase that it may face a lawsuit over claims that its staking service, Prime and Wallet products, and its general listing process could all be in violation of federal securities law. Gensler has reiterated his view that crypto intermediaries must register as regulated entities in the US, stating that the crypto markets suffer from a lack of regulatory compliance rather than a lack of regulatory clarity.

In response to the SEC's allegations, Coinbase has stated that it has repeatedly answered questions from the regulator about how it determines whether listed assets are securities or not. The exchange also refuted the claims that it was simultaneously operating a national securities exchange, brokerage, and clearinghouse. Coinbase argued that the threat of imminent litigation is meant to pressure the company into accepting demands that the SEC lacks the authority to order, including agreeing that nearly all digital assets listed on its platform are securities and overhauling its entire business model to register as a national securities exchange and clearing agency.

Coinbase CEO Brian Armstrong and General Counsel Paul Grewal have met with SEC officials after filing their response. However, Grewal stated that the staff level remains unpersuaded, and the company is fully preparing for litigation. Despite this, Grewal remains optimistic that cooler heads will prevail, but he does not expect the SEC to change its mind.

Coinbase shares have risen more than 53% since the beginning of January but remain down 82% since its initial IPO in April 2021. The conflict between Coinbase and the SEC is part of a larger effort in Washington to rein in the cryptocurrency market. Other exchanges, including Bittrex and Kraken, have also faced issues with the SEC. Bittrex announced the winding down of its US operations in late March, while Kraken reached a $30 million settlement with the SEC after being accused of offering unregistered securities through its crypto staking program.

Coinbase has stated that it owns both a broker-dealer and alternative trading system (ATS) but requires SEC and Financial Industry Regulatory Authority (FINRA) approval to operate them. The company also holds 45 money transmitter licenses, a New York BitLicense, and a designated contract market. The exchange has sought clarity from the SEC on various issues, including its asset listing process, Wallet product, and staking services. Despite providing information in response to the SEC's questions, the exchange has claimed that the regulator raised no concerns during meetings about the products.