The U.S. 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, crypto lawyer James Murphy tweeted on July 9.
Murphy, who goes by MetaLawMan on Twitter, said that the SEC’s arguments are “not particularly strong.”
The SEC’s case
In its letter, the regulator alleged that Coinbase, with its string of “sophisticated” lawyers, “understood that the securities laws could apply ” to its business. In other words, Coinbase was well aware that it could be potentially breaking securities laws by operating, as per the SEC.
The SEC submitted its letter in response to Coinbase seeking permission to file a motion for judgment on pleadings on June 28. The market watchdog said it will oppose any such motion if the court permits Coinbase to file.
Murphy explained:
“While the SEC will oppose the motion, it will not try to delay consideration of the issues raised by Coinbase.
This means there is at least some hope of a prompt resolution of the case.”
Weak arguments
Murphy believes that the SEC’s arguments against Coinbase are weak because it cited the case of SEC v. LBRY, among a few others, in its letter. In the case, which the SEC won in November 2022, token issuer LBRY was charged with offering crypto as unregistered securities.
In the SEC v. LBRY case, the court drew no distinction between investors who bought crypto directly from the issuer and those who purchased it on a secondary trading platform, as per the SEC’s letter. The regulator uses the case to support its argument that a crypto security does not cease to be a security simply because it’s being traded on a secondary platform like Coinbase.
However, according to Murphy, the judge in the cited case did not rule that tokens traded on secondary platforms are securities. Therefore, the case does not sufficiently support the SEC’s argument, Murphy believes. He noted:
“The SEC relies on an inapplicable case out of Connecticut that was brought against the issuer of a token–not against a secondary trading platform.”
Murphy added that the regulator may come up with “better case law” during the full briefing, but “this is not signaling strength.”
Major Questions Doctrine
The Major Questions Doctrine refers to the Supreme Court rulings that state that if a regulatory agency seeks to decide an issue of major national importance, the agency’s actions must be supported by clear authorization from Congress. Coinbase’s defense uses the Major Questions Doctrine to indicate that the SEC does not have congressional authorization for its actions.
In its filing, Coinbase has cited the remarks of SEC chief Gary Gensler in front of Congress in 2021 to support its case. In May 2021, Gensler testified that the SEC did not have the statutory authority to regulate crypto exchanges, as per the Coinbase filing. Gensler added that only Congress could address the regulatory gaps since the exchanges do not have a regulatory framework.
Coinbase chief legal officer Paul Grewal tweeted on July 8 that the SEC’s letter was ‘more of the same’ — ignoring questions of importance. Grewal noted that the SEC did not respond to Genler’s 2021 comments, and ignored the “clear and unmistakable warnings of the Supreme Court just last week against regulatory overreach in major questions reserved to Congress.”
While the SEC will move to strike Coinbase’s defense under the Major Questions Doctrine, Murphy says that the regulator is unlikely to succeed. He noted:
“It is likely, in my view, that Coinbase will eventually prevail on the MQD argument either at the district court level or on appeal.”
The pre-motion conference on the case is set for July 13. According to Murphy, Coinbase’s strategy to expedite the case “appears to be working.”
