Coinbase Files Motion To Dismiss SEC Lawsuit – Here’s Why

Prominent crypto exchange Coinbase is currently seeking to dismiss the allegations leveled against it by the United States Securities and Exchange Commission (SEC). 

On Aug. 4, lawyers representing Coinbase submitted a motion to dismiss at the US District Court for the Southern District of New York, claiming the exchange does not offer securities and operates outside the SEC’s jurisdiction in terms of regulations. 

Back in June, the SEC had sued Coinbase on charges of “operating as an unregistered securities exchange, broker and clearing agency.”

Coinbase Bases Case Dismissal On Ripple Vs. SEC, Among Other Factors

In its motion to dismiss on Friday, Coinbase argues that the trade of the 12 tokens highlighted in the SEC’s case does not qualify as securities transactions based on existing US laws, most notably the Howey Test.

According to the exchange, purchasing these tokens is synonymous with owning baseball cards in that there are no contractual obligations on the baseball card company to work towards an appreciation of these cards’ value as in the case of actually buying shares in the company.

A statement from the filing read:

….the transactions over Coinbase’s platform and Prime are not and do not involve, contractual undertakings to deliver future value reflecting the income, profits, or assets of a business. They are commodity sales, with the obligations on both sides discharged entirely the moment the digital token is delivered in exchange for payment. The SEC’s Complaint does not allege otherwise. 

Furthermore, Coinbase also references the  Ripple v. SEC cases stating the arguments laid out by the commission in both cases are quite similar. 

In July, US Judge Analisa Torres ruled that programmatic sales of XRP to retail investors violated no existing securities law. Using this case sample, Coinbase supports its petition, stating that the “secondary market sales of all these tokens (cryptocurrencies) are all asset sales carrying no post-sale contractual obligations.”

In addition, the crypto exchange also tackles the SEC’s charges of operating as a “broker of investment contracts” due to its non-custodial wallet service. Coinbase states that the NEXO token highlighted in this particular scenario by the financial regulator is similar to the 12 other tokens as it grants no share in any enterprise and cannot be termed a security.

Finally, Coinbase lawyers stated that SEC allegations against the exchange’s staking program are inadequate as Coinbase only serves as a staking medium, offering no managerial services to its staking customers.

Total crypto market cap valued at $1.22 trillion on the 4-hour chart | Source: TOTAL chart on Tradingview.com

The SEC Violated Due Process, Coinbase CLO Says

Commenting on Coinbase motion to dismiss, the exchange’s Chief Legal Officer, Paul Grewal, on social media platform X, said that the SEC had sidelined due process and disregarded existing legal precedents as a result of its lawsuit against the exchange. 

According to Grewal, the SEC was operating outside its jurisdiction as set by the US Constitution. He said:

Our core argument is simple — we do not offer “investment contracts” as that term has been construed by decades of Supreme Court and other binding precedent. By ignoring that precedent, the SEC has violated due process, abused its discretion, and abandoned its own earlier interpretations of the securities laws. By ignoring that precedent, the SEC has trampled the strict boundaries on its basic authority set by Congress”

According to the court’s scheduling order, the SEC is expected to file a response to Coinbase’s petition by Oct. 3, while there is a set deadline on Aug. 11 to submit all amicus briefs in support of its case.