Coinbase Knew It May Have Been Violating the Law Prior to the SEC's Lawsuit, Regulator Claims

The regulator filed its response to a COINBASE filing which argued that the agency does not have sufficient jurisdiction to bring a lawsuit against it. The SEC sued Coinbase a month ago, alleging it was operating as an unregistered broker, clearinghouse and exchange all in one go, having listed at least 13 different cryptocurrencies that are unregistered securities. In Friday's document, the SEC said that it would oppose any motion for judgement Coinbase might file, and asked a court to strike Coinbase's arguments that the suit violated the major questions doctrine and other concerns.

"Coinbase, a multi-billion-dollar entity advised by sophisticated legal counsel, argues it was unaware that its conduct risked violating the federal securities laws, and suggests that by approving Coinbase’s registration statement in 2021 the SEC confirmed the legality of Coinbase’s underlying business activities – at that time and for all time," the SEC said in its filing.

However, the regulator continued, Coinbase had previously "adopted the very legal framework" enacted by the U.S. Supreme Court to determine whether certain cryptocurrencies met the requirements of federal securities laws, while "explicitly discourag[ing]" crypto issuers from making any statements "traditionally associated with securities."

Read more: SEC Has No Jurisdiction Over Cryptos on Coinbase, Exchange Says in Lawsuit Response

Coinbase's own public filings also note that one potential risk to Coinbase investors include the fact that listed assets might be considered securities.

"These actions clearly show that Coinbase understood that the securities laws could apply to its conduct and knew which rules to consider in evaluating the legality of its conduct, but nevertheless made the calculated decision to take on this risk in the name of growing its business," the filing said.

The SEC also previewed its arguments pushing back against Coinbase's proposed motion for judgement, saying the crypto exchange made two "equally flawed arguments."

The first argument Coinbase made was saying an investment contract must include a formal contract, while the second said investment contracts are only asset sales if they're being traded on secondary markets.

The Howey Test does not need a formal contract, the SEC said, and transactions on secondary markets may still violate securities laws.

The SEC pointed to its recent legal win against LBRY as one of its examples in making this second argument.

Coinbase is also wrong in its major questions doctrine argument, the SEC said: "This case, by contrast, involves the SEC’s exercise of its longstanding authority to enforce statutory requirements. In 1934, Congress authorized the SEC to enforce the federal securities laws through civil law enforcement actions."

A hearing is currently scheduled for July 13 in the District Court for the Southern District of New York.

UPDATE (July 7, 2023, 21:35 UTC): Adds additional detail.