The U.S. Securities and Exchange Commission (SEC) has outlined the arguments it plans to use against Coinbase in a letter to the judge on July 7. However, the SEC’s case against Coinbase doesn’t inspire much confidence, crypto attorney James Murphy tweeted July 9.
Murphy, who goes by MetaLawMan on Twitter, said the SEC’s arguments are “not particularly strong.”
The case of the SEC
In its letter, the regulator alleged that Coinbase, with its slew of “sophisticated” lawyers, “understood that securities laws could apply” to its business. In other words, Coinbase was well aware that it could potentially violate securities laws by operating, according to the SEC.
The SEC submitted its response letter to Coinbase requesting permission to file a motion for judgment on the pleadings on June 28. The market watchdog said it would oppose such a motion if the court allowed Coinbase to file.
Murphy explained:
“While the SEC will oppose the motion, it will not attempt to delay consideration of the issues raised by Coinbase.
This means that there is at least some hope for a quick resolution to the case.
Weak Arguments
Murphy believes that the SEC’s case against Coinbase is weak as he cited the case of SEC against LBRY, among a few others, in his letter. In the casewhich the SEC won in November 2022, token issuer LBRY was accused of offering the crypto as unregistered securities.
In SEC v. LBRY, the court made no distinction between investors who bought the crypto directly from the issuer and those who bought it on a secondary trading platform, according to the SEC letter. The regulator is using the case to support its argument that a crypto security does not cease to be a security just because it is traded on a secondary platform like 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 noted:
“The SEC is relying on an unenforceable case outside of Connecticut that was brought against a token’s issuer — not against a secondary trading platform.”
Murphy added that the regulator might offer “better case law” during the full briefing, but “that’s not a sign of strength.”
Major Issues Doctrine
The major issues doctrine refers to Supreme Court rulings that state that if a regulatory agency seeks to decide a matter of major national importance, the agency’s actions must be supported by clear authorization from Congress. Coinbase’s defense uses the major issues doctrine to argue that the SEC does not have congressional authorization for its actions.
In its filing, Coinbase cited SEC Chief Gary Gensler’s remarks before Congress in 2021 to support its case. In May 2021, Gensler testified that the SEC lacks legal authority to regulate crypto exchanges, per the Coinbase filing. Gensler added that only Congress can fill regulatory gaps since the exchanges have no regulatory framework.
Coinbase Chief Legal Officer Paul Grewal tweeted on July 8 that the SEC letter was “more or less the same” – ignoring the important issues. Grewal noted that the SEC did not respond to Genler’s comments in 2021 and ignored the Supreme Court’s “clear and unequivocal warnings last week against regulatory overreach in major matters reserved for Congress.”
As the SEC prepares to hit Coinbase’s defense under the major issues doctrine, Murphy says the regulator is unlikely to succeed. He noted:
“It is likely, in my view, that Coinbase will ultimately prevail over the MQD argument, either at the district court level or on appeal.”
The pre-motion conference on the case is set for July 13. According to Murphy, Coinbase’s strategy to speed up the deal “seems to be working.”
