Coinbase’s Legal Battle with the SEC Comes to an End
On Friday, Coinbase announced a significant development in its ongoing struggle with the U.S. Securities and Exchange Commission (SEC). The regulator is reportedly planning to withdraw its lawsuit against the prominent crypto exchange, marking a potential end to a lengthy and contentious legal battle that many viewed as crucial for both Coinbase and the broader cryptocurrency sector.
Under the Republican leadership since President Donald Trump took office, the SEC has swiftly shifted its strategies regarding the oversight of the crypto industry. This includes the establishment of a dedicated task force and the rescission of vital crypto-related accounting guidance. Although the SEC declined to comment on the matter, it has been anticipated that the agency would review pending legal cases and potentially retract its litigation efforts even before formal regulatory changes were instituted, as previously reported by Reuters.
The decision to recommend the dismissal of the lawsuit against Coinbase, which was one of several legal actions initiated under the SEC’s previous chair, signifies a dramatic shift in the agency’s approach. “The war against crypto, at least as it applies to Coinbase, is over,” stated Coinbase’s Chief Legal Officer, Paul Grewal, in an interview.
Republican officials within the SEC have rapidly begun to reform the agency’s crypto policies, even prior to the appointment of Paul Atkins, who is seen as a pro-crypto candidate for SEC chair. The reevaluation of cases against crypto firms, particularly those that may have breached SEC regulations without defrauding investors, has been widely anticipated. However, many legal experts have expressed the view that while the SEC might seek settlements, a sweeping effort to dismiss all pending cases would be unprecedented.
In 2023, the SEC took legal action against both Coinbase, the largest cryptocurrency exchange in the U.S., and its competitor Binance. A court has since paused the SEC’s lawsuit against Binance following a request from both the SEC and Binance, citing implications related to the new task force. The SEC also filed a lawsuit against the crypto exchange Kraken in the same year.
The allegations against Coinbase included claims that it violated SEC rules by facilitating trading in at least 13 crypto tokens that the agency argued should have been registered as securities. Additionally, the lawsuit targeted Coinbase’s “staking” program, through which the exchange pools assets to verify activities on blockchain networks and charges commissions in return for rewards distributed to customers. The SEC contended that this program should have been registered with them.
Coinbase has maintained that crypto assets, unlike traditional stocks and bonds, do not fulfill the definition of an investment contract, a stance shared by the majority of the crypto industry. Drawing on a precedent set by a U.S. Supreme Court ruling, the key test for determining whether an investment product qualifies as a security hinges on whether individuals are investing in a common enterprise with an expectation of profit.
However, advocacy groups such as Better Markets, which pushes for stricter regulations in the financial sector, criticized the SEC’s potential decision to drop its lawsuit against Coinbase. “The SEC used to enforce the law without fear or favor but is now favoring the crypto industry and fearing billionaire crypto kingpins who are publicly belittling the agency,” stated Dennis Kelleher, president and CEO of the organization.
In the wake of the news, shares in Coinbase surged more than 3.5%, reflecting investor optimism. Analysts at Piper Sandler noted in a research report that the dismissal of the case “removes a significant overhang that we believe has kept some investors on the sidelines for nearly two years.”
Shifts in SEC Leadership and Policy
Former SEC Chair Gary Gensler prioritized combating misconduct within what he referred to as the “wild west” of the crypto sector, targeting not only fraudsters but also major trading platforms like Coinbase. His administration expanded the size of the crypto enforcement unit to bolster these efforts. However, the SEC has since scaled back its enforcement activities, reallocating lawyers and recently renaming the unit to focus on “cyber and emerging technologies.”
Acting SEC Chair Mark Uyeda and Republican Commissioner Hester Peirce have expressed discontent with Gensler’s litigation-focused approach, advocating instead for the establishment of new, crypto-specific regulations. “We have a very positive, productive relationship with this new SEC and are working (in) lock step with them, arm in arm, to get this addressed,” Grewal commented.
Commissioner Peirce, often referred to as “crypto mom” in the industry, is spearheading the agency’s new initiatives aimed at overhauling its policies. Public records indicate that the new task force has convened at least eight meetings to explore changes.
As a former chief of the SEC’s office of internet enforcement noted, “It’s not surprising because this administration, Mark Uyeda and Hester Peirce, their view is that digital assets are not securities by and large. If you have that position, then you cannot assert in any pleading anywhere a digital asset is a security.”
During his first week in office, Trump initiated the formation of a cryptocurrency working group tasked with proposing new regulations for digital assets and examining the possibility of establishing a national cryptocurrency stockpile, fulfilling his commitment to promptly reform U.S. crypto policy. On the campaign trail, Trump positioned himself as a “crypto president” and actively sought financial support from the industry by promising to foster the adoption of digital assets. Additionally, in an executive order, Trump instructed that banking services for crypto firms be safeguarded, alluding to industry claims that U.S. regulators were directing banks to sever ties with crypto companies—an assertion regulators have denied.
