21-6-2023 (SAN FRANCISCO) In a strategic move preceding the recent legal action taken by the U.S. Securities and Exchange Commission (SEC) against Coinbase, the leading cryptocurrency exchange had already embarked on a unique legal offensive. Coinbase engaged top lawyers to advocate for specific court rulings in unrelated cases, ultimately aiming to shape the legal landscape in its favor.
Before the SEC filed its lawsuit against Coinbase on June 6, the company had actively intervened in two other crypto-related lawsuits initiated by the regulatory body. Coinbase had submitted amicus briefs, commonly known as “friend of the court” briefs, which are typically filed at the U.S. Supreme Court but rarely seen in federal trial courts. However, with the rise in SEC cases related to cryptocurrencies, industry groups have increasingly filed amicus briefs to support defendants.
While the outcome of these cases would not directly impact Coinbase’s own legal proceedings, the company could potentially reference favorable rulings in its defense. Legal experts have noted that previous judges who ruled on similar cases tended to support the SEC’s approach.
By filing amicus briefs in trial courts, Coinbase aimed to initiate progress in shaping the legal framework surrounding key issues that concern the company. Akiva Shapiro, one of the authors of a study conducted by law firm Gibson Dunn & Crutcher, explained that filing such briefs helps set the legal direction for matters that the amicus party cares deeply about. Gibson Dunn, which represents Coinbase in one of the cases, played a significant role in this legal strategy.
Both the SEC and Coinbase declined to comment on the matter when approached by reporters.
For several years, the SEC had primarily targeted developers for selling unregistered digital tokens. However, the regulatory focus has recently shifted towards major players in the cryptocurrency industry, such as exchanges, as the SEC attempts to establish regulation in what its Chairman, Gary Gensler, referred to as the “Wild West” of cryptocurrencies.
Coinbase, now the SEC’s primary target in the United States, is being sued in a federal court in Manhattan. The SEC alleges that the company operated an unregistered exchange, brokerage, and clearinghouse, claiming that at least 13 of the crypto assets offered by Coinbase to U.S. investors, including Solana, Cardano, and Polygon, are securities.
Shortly after the SEC initiated its investigation into Coinbase, the company began its strategic legal campaign by enlisting the support of prominent corporate defense law firms, Gibson Dunn and Cahill Gordon & Reindel, to file relevant legal documents in the two aforementioned cases.
In one instance, Coinbase advocated for the dismissal of an insider trading case brought by the SEC against former Coinbase product manager Ishan Wahi, where Coinbase itself was not named as a defendant. Coinbase’s amicus brief, which could provide insight into its defense strategy, argued that the SEC lacked the authority to regulate the cryptocurrency space, emphasizing that many digital assets do not meet the definition of securities.
The company contended that the SEC misapplied a legal test used to determine if an investment qualifies as an investment contract, which falls under the category of a security. Coinbase asserted that the digital assets on its platform did not meet this test, primarily because they lacked contractual agreements.
The SEC, on the other hand, asserted that the application of the test should consider the economic realities of transactions rather than the labels assigned to them. The regulatory body urged judges to focus on how digital assets are marketed, highlighting promises made by crypto developers that investors would profit from the success of their projects.
Coinbase’s amicus brief also argued that the SEC had not provided clear guidelines to give participants in the cryptocurrency industry “fair notice” regarding whether a specific digital asset should be considered a security. Coinbase claimed that the lack of clear guidance violated participants’ right to due process under the U.S. Constitution.
SEC Chairman Gensler dismissed this argument, stating that many companies in the cryptocurrency space deliberately chose to disregard regulations as a “calculated economic decision.”
In another amicus brief, Coinbase urged a federal judge in Manhattan to allow the fair notice defense in the SEC’s case against Ripple Labs. Ripple Labs, based in San Francisco, faced allegations from the SEC in 2020, accusing the company and its executives of conducting an unregistered securities offering worth $1.3 billion through the sale of the XRP cryptocurrency.
Coinbase argued that denying Ripple Labs the fair notice defense would undermine the defense’s validity in future cases. Over a dozen other cryptocurrency industry groups and market participants also submitted amicus briefs supporting the notion that XRP should not be classified as a security.
A ruling on the matter is expected later this year, which could have significant implications for the broader cryptocurrency industry.
