Coinbase Must Face SEC Lawsuit
The U.S. Securities & Exchange Commission (SEC) has made it their mission to crack down on aspects of the cryptocurrency industry in recent months and years, intending to regulate it more strictly for the benefit of its investors. In 2023, the commission charged Coinbase, the world’s largest publicly traded cryptocurrency exchange platform, with operating as an unlicensed securities broker/exchange/clearing agency. The platform had sought dismissal of the charges, but a federal judge in Manhattan ruled in March 2024 that most of the case may move forward in a potentially landmark outcome for the SEC.
Based On Howey
The groundwork for most of the SEC’s recent claims against cryptocurrency exchanges has been based in the ruling in SEC v W.J. Howey & Co (1946), in which the U.S. Supreme Court attempted to define a security as an ‘investment contract.’ The ruling in Howey laid out certain criteria that an asset has to meet in order to be classified as an investment contract (and, thus, a security): namely, that it must be a (1) “investment of money;” (2) in a common enterprise; (3) with a “reasonable expectation” of profits; (4) “derived from the efforts of others.”
Crypto exchanges have tried to argue that their profits do not derive solely from the efforts of others, and thus that crypto does not qualify as a security, but in general, the courts have disagreed. There have been very few cases that have touched this question as of this writing, but those that have been ruled upon have generally gone in the SEC’s favor. While the recent ruling against Coinbase only comes in a preliminary hearing, it is still remarkable that most of it has come down in the commission’s favor.
One Claim Dismissed
The Manhattan federal judge did rule against the SEC in one respect: they dismissed the charge that Coinbase had been acting as an unlicensed broker. That said, the judge rejected Coinbase’s arguments that crypto does not qualify as a security because their profits are partially derived from their own efforts. They cited the fact that developers in the industry were open about enhancing and improving technology to improve the cryptocurrency industry experience – which, one might imagine, would enhance profits for all those involved.
Despite the dismissal of one claim, the charges of acting as a clearing agency and an exchange remain against Coinbase, and now they will be debated in open court unless a settlement is reached. It remains to be seen what outcome this will have for investors, but it is notable that the SEC continues to pursue a very single-minded policy with regard to the cryptocurrency industry, and investors with questions or concerns should not be afraid to seek legal assistance before actually investing their capital.
Contact A Seminole, FL Securities Law Attorney
While the ultimate outcome of the SEC’s case against Coinbase remains to be seen, it has the potential to create new rules and regulations for potential investors in securities. If you are looking to invest and have questions or concerns, it is a good idea to contact an experienced attorney. A Florida securities law attorney from the Hunt Law Group may be able to assist. Call our office today to schedule a consultation.
Source:
sec.gov/news/press-release/2023-102
