Why the battle between Coinbase and the SEC concerns the entire crypto ecosystem

On Wednesday, a US federal judge authorized the US stock market watchdog to sue crypto giant Coinbase, accused of operating without authorization.

The lawsuit filed by the Securities and Exchange Commission (SEC) against Coinbase can continue, a federal judge in a Manhattan court ruled on Wednesday, who however rejected one of the American stock market watchdog’s requests against the platform. cryptoasset exchange.

This decision partly vindicates Coinbase, which wanted to have the lawsuit dismissed, contesting having violated SEC rules. The battle could, however, be long and costly. The SEC and Coinbase did not immediately respond to a request for comment.

The stock market watchdog in the United States launched legal proceedings against the largest American cryptoasset exchange platform in June, accusing it of having operated illegally without first registering with the regulatory authority. The SEC then noted that Coinbase facilitated the trading of at least 13 crypto tokens that should have been registered as securities.

It also accused Coinbase of operating as an unregistered broker through Coinbase Prime, which routes trading orders to Coinbase’s platform and other platforms, and Coinbase Wallet, which allows investors to access liquidity outside of Coinbase’s platform.

Judge Katherine Polk Failla allowed most of the SEC’s lawsuits to proceed, but rejected the watchdog’s accusation that Coinbase acted as an unregistered broker through its trading application. wallet. The lawsuit marks the culmination of a campaign by the US regulator to enforce securities laws on digital asset companies.

“Efforts of others”

To do this, the SEC relied heavily on a ruling from the United States Supreme Court establishing a test for determining whether an investment constitutes a security. A key element of this case law is whether the returns “arise solely from the efforts of others.”

Coinbase has argued that cryptoassets, unlike stocks and bonds, do not meet this definition, a position shared by the vast majority of the cryptoasset industry. Katherine Polk Failla rejected this argument, finding plausible the SEC’s accusations that some of the digital assets listed on the trading platform are securities.

The SEC highlighted statements from developers, including Solana Labs and Polygon Technology, regarding efforts to implement and improve their technology.

“An objective investor in the primary and secondary markets would perceive these statements as promising the possibility of profits arising solely from the efforts of others,” the judge wrote.

In previous court cases, judges have generally sided with the SEC’s view that the cryptoassets in question were securities. These securities, unlike assets like commodities, must be registered with the SEC by their issuer and require detailed disclosures to inform investors of potential risks.