The US Securities and Exchange Commission (SEC) has previewed the arguments it plans to use against Coinbase in a letter in court on July 7. However, the SEC’s case against Coinbase doesn’t inspire much confidence, crypto lawyer James Murphy says tweeted on July 9.
Murphy, who uses MetaLawMan on Twitter, said the SEC’s arguments are “not particularly strong.”
The SEC case
In its letter, the regulator claimed that Coinbase, with its array of “sophisticated” lawyers, “understood that securities laws could apply” to its company. In other words, Coinbase was well aware that it could potentially violate securities laws by operating, according to the SEC.
The SEC filed its letter in response to Coinbase requesting permission to file a motion for a verdict on pleas on June 28. The market watchdog said it will oppose such a motion if the court allows Coinbase to file an application.
Murphy explained:
“While the SEC will oppose the motion, it will not seek to delay consideration of the issues raised by Coinbase.
This means that there is at least some hope for a speedy resolution of the matter.”
Weak arguments
Murphy believes the SEC’s arguments against Coinbase are weak as it cited the SEC v. LBRY case in its letter, among other things. In the casewhich the SEC won in November 2022, token issuer LBRY was accused of listing crypto as unregistered securities.
In the SEC v. LBRY case, the court did not distinguish between investors who bought crypto directly from the issuer and those who bought it on a secondary trading platform, according to the SEC’s letter. The regulator is using 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 such as 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 noticed:
“The SEC is relying on an inapplicable Connecticut case brought against a token issuer, not a secondary trading platform.”
Murphy added that the regulator may come up with “better case law” during the full briefing, but “this is not signal strength.”
Big Questions Doctrine
The Major Questions Doctrine refers to Supreme Court rulings stating that for a regulatory agency to make a decision on a matter of major national importance, the agency’s actions must be backed 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 cited SEC Chief Gary Gensler’s remarks to Congress in 2021 to support its case. In May 2021, Gensler testified that the SEC lacked the legal authority to regulate crypto exchanges, according to the Coinbase filing. Gensler added that only Congress can fill in the regulatory gaps since the exchanges have no regulatory framework.
Paul Grewal, Coinbase’s Chief Legal Officer, tweeted on July 8 that the SEC’s letter was “more of the same,” ignoring important questions. Grewal noted that the SEC did not respond to Genler’s 2021 comments, ignoring the Supreme Court’s “clear and unequivocal warnings last week against regulatory overstepping on important issues reserved for Congress.”
While the SEC will move to attack Coinbase’s defense under the Major Questions Doctrine, Murphy says the regulator is unlikely to succeed. He noticed:
“It is likely, in my opinion, that Coinbase will ultimately prevail over the MQD argument, either at the 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 “appears to be working.”