The US Securities and Exchange Commission (SEC) provided a preview of the arguments it plans to use against Coinbase in a letter to the judge on July 7. However, the SEC’s case against Coinbase does not inspire much confidence, said crypto lawyer James Murphy. tweeted on July 9.
Murphy, who calls himself MetaLawMan on Twitter, said the SEC’s arguments “are not particularly strong.”
The SEC case
In its letter, the regulator alleged that Coinbase, with its array of “sophisticated” lawyers, “understood that securities laws might apply” to its business. In other words, Coinbase was well aware that it might be violating securities laws by trading, according to the SEC.
The SEC filed its letter in response to Coinbase seeking permission to file a judgment motion on the allegations on June 28. The market watchdog said it will oppose such a motion if the court allows Coinbase to file it.
“While the SEC will oppose the motion, it will not attempt to delay consideration of the issues raised by Coinbase.
This means that there is at least some hope of a speedy resolution of the case.”
Murphy believes that the SEC’s arguments against Coinbase are weak because he cited the case of SEC v. LBRY, among a few others, in his letter. In the case, which the SEC won in November 2022, token issuer LBRY was accused of offering cryptocurrency as unregistered securities.
In the case SEC v. LBRY, the court made no distinction between investors who bought cryptocurrency directly from the issuer and those who bought it on a secondary trading platform, according to the SEC letter. The regulator uses the case to support its argument that a crypto security does not cease to be a security simply because it is traded on a secondary platform like Coinbase.
However, according to Murphy, the judge in the cited case did not rule that the tokens traded on secondary platforms are securities. Therefore, the case does not sufficiently support the SEC’s argument, Murphy believes. He noticed:
“The SEC is relying on an unenforceable Connecticut case that was brought against a token issuer, not a secondary trading platform.”
Murphy added that the regulator may present “better case law” during the full briefing, but “this is not a sign of strength.”
Doctrine of the main questions
The Major Issues Doctrine refers to Supreme Court rulings that if a regulatory agency seeks to decide an issue of high national importance, the agency’s actions must be backed by clear authorization from Congress. Coinbase’s defense uses the Leading Questions Doctrine to indicate that the SEC does not have congressional authorization for its actions.
In its filing, Coinbase cited SEC head Gary Gensler’s comments in front of Congress in 2021 to support its case. In May 2021, Gensler testified that the SEC did not have the legal authority to regulate cryptocurrency exchanges, according to the Coinbase filing. Gensler added that only Congress could address regulatory gaps since exchanges do not have a regulatory framework.
Coinbase’s chief legal officer, Paul Grewal, tweeted on July 8 that the SEC’s letter was “more of the same,” ignoring important issues. Grewal noted that the SEC did not respond to Genler’s 2021 comments and ignored the Supreme Court’s “clear and unequivocal warnings last week against regulatory overreach on important issues reserved for Congress.”
While the SEC will move to attack Coinbase’s defense under the Lead Questions Doctrine, Murphy says the regulator is unlikely to succeed. He noticed:
“In my opinion, it is likely that Coinbase will ultimately prevail in the MQD argument, either at the district court level or on appeal.”
The pre-motion conference on the case is scheduled for July 13. According to Murphy, Coinbase’s strategy to expedite the case “seems to be working.”
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