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Coinbase Accuses SEC Of Overreach in Lawsuit, Says It Wants Regulatory Authority To Match Its ”Ambition”

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Coinbase said the US Securities and Exchange Commission (SEC) is overreaching its regulatory authority as it seeks to dismiss a lawsuit the regulator filed against it.

The SEC’s definition of what constitutes an investment contract is overly broad, and assets traded on Coinbase’s platform do not fall under the regulator’s purview, it said in an Oct. 24 court filing.

The SEC’s authority is limited to securities transactions,” it said. “Not every parting of capital with a hope of gain qualifies, and trades over Coinbase are only securities transactions if they involve ‘investment contracts.’ The transactions at issue here do not.” 

Coinbase argues that investment contracts should provide purchasers with a contractual claim tied to a business enterprise’s future income, profits, or assets.

It claims the SEC is suggesting a significant change from established practice to enhance its control, and needs to provide clear boundaries to differentiate between investments it can regulate and those it can’t. 

“It claims authority over essentially all investment activity—and thus the right to define its regulatory ambit, constrained only by its own ambition,” the filing said. 

Coinbase Says SEC Stretches Howey Test ”Beyond Recognition”

The SEC has relied on the Howey Test, a benchmark set by a 1946 U.S. Supreme Court case, to determine whether certain transactions qualify as investment contracts subject to securities laws.

Coinbase contends that the SEC has stretched the Howey Test’s scope “beyond recognition” to support its classification of cryptocurrencies.

The SEC’s perspective is that any transaction involving a purchase with an expectation of increased value or the commitment of capital could fall under their regulatory jurisdiction, which Coinbase argues is excessively broad. 

To illustrate this point, Coinbase provides an example where an artist is selling their paintings on Etsy. They suggest that the SEC’s perspective would label each sale and subsequent resale as a securities transaction.

“Etsy would have to register with the SEC as a national securities exchange, and the artist would have to file expansive public disclosures about her art-selling activities,” the filing read, demonstrating the “endless breadth” of the SEC’s assertion of authority.

Expert Insights

Legal experts, including John E. Deaton, the founder of CryptoLaw US, have given their input on the case. 

Deaton has suggested that there’s a strong possibility the court may rule in favour of the cryptocurrency company. In particular, Deaton pointed out that the District Court Judge Katherine Polk Failla, overseeing the case, could decide that the SEC’s use of the Howey Test doesn’t encompass secondary sales, like the ones occurring on Coinbase’s trading platform.

The SEC sued Coinbase in June, accusing the exchange of violating U.S. securities laws by listing several tokens it considers securities and not registering with the regulator. Coinbase responded with a motion for judgment on June 29, asserting that the SEC was abusing its power and violating its due process rights.

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