Coinbase Seeks Dismissal of SEC Lawsuit, Contending Tokens Do Not Constitute Investment Contracts

**Coinbase Files Motion to Dismiss SEC Lawsuit, Citing Lack of Jurisdiction**

Cryptocurrency exchange Coinbase has filed a motion to dismiss the Securities and Exchange Commission’s (SEC) lawsuit accusing the company of offering unregistered securities. In a letter to U.S. District Judge Katherine Failla, Coinbase argues that the digital assets it lists for trading are not investment contracts and therefore do not fall under the jurisdiction of the SEC.

**Tokens Sold by Coinbase Are Not Investment Contracts**

According to Coinbase, the tokens it sells cannot be considered investment contracts because they are simply assets without any underlying contractual obligation. Coinbase’s top lawyer, Paul Grewal, compared these digital assets to the oranges involved in the famous Supreme Court case, Howey, which established criteria for determining an investment contract. The Howey case revolved around the sale of real estate parcels in Florida that included orange groves and promised income from the sale of the fruit. The Supreme Court ruled that the transactions were indeed securities.

Coinbase argues that any investment contract related to the tokens for sale on its platform would have occurred in earlier stages between the token creators and the initial buyers. The company emphasizes that it has a rigorous internal vetting process, with over 90% of all tokens being deemed ineligible for sale.

**The Uncertain Legal Landscape and Coinbase’s Defense Strategies**

The legal status of tokens listed on Coinbase’s platform has not been fully tested in U.S. courts yet, as the cryptocurrency laws are still evolving. Coinbase also invokes a theory proposed by a former senior SEC official, which suggests that tokens that were once considered securities can lose that status as the blockchains hosting them become more decentralized.

In addition, Coinbase utilizes a “fair notice defense” in its filings, arguing that the government cannot initiate prosecutions if individuals were not adequately informed about applicable laws. The company relies on SEC Chairman Gary Gensler’s prior statements that imply the agency lacked the authority to regulate cryptocurrencies before 2021. Coinbase also highlights the SEC’s acknowledgment of a “regulatory gap” in the field.

**Existential Threat to Coinbase and U.S. Crypto Companies**

Coinbase’s motion to dismiss the SEC lawsuit comes at a critical time when the lawsuit poses an existential threat to the company and other U.S. crypto firms. A ruling on the dismissal motion is expected by the end of 2023. However, winning the case at this stage is challenging since there is a high burden of proof to show that a court should not hear a case. The case will likely be decided at the summary judgment stage, where both parties present their arguments based on a full body of evidence, likely in 2024.

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