Coinbase has 70% chance of full dismissal in SEC lawsuit — Litigation analyst

Bloomberg senior litigation analyst Elliott Stein has indicated he sees minimal likelihood of failure for cryptocurrency exchange Coinbase in its ongoing lawsuit against the United States Securities and Exchange Commission (SEC). Stein forecasts a 70% chance of the exchange securing a full dismissal in the lawsuit.

In a post on Jan. 19 on X (formerly Twitter), Stein explained that before he entered the courtroom, he was confident that Coinbase could object successfully to certain SEC claims but not those allegations relating to its staking rewards program and overall operational structure. 

However, his confidence shifted after the five-hour hearing:

“I went into SEC v. Coinbase hearing thinking COIN would, on this motion, win dismissal of SEC's primary claims (concerning trading) but maybe not staking and broker claims. I left thinking COIN would win full dismissal.”

The SEC alleges that by staking customer assets, earning rewards on their behalf and returning them, Coinbase is engaging in offering and selling investment contracts, thereby falling under SEC regulation.

Furthermore, the regulator alleges that Coinbase was operating as an unregistered broker. Meanwhile, Coinbase has strongly refuted this, stating there is no easy way for a crypto exchange to register for a license. 

However, Stein explains it was a turning point when Coinbase provided a more precise definition of an “investment contract” than the SEC.

“My view the one offered by Coinbase as more compelling, requiring investment in a business vs. just an ecosystem, along with an enforceable obligation,” he stated.

Greetings from federal court in Lower Manhattan! Today's episode: @coinbase motion to toss the @SECGov suit. Should be a great (4hr long!) argument, with top lawyering, a fascinating/unsettled legal q, & Judge Failla – sharp as a knife & a sense of humor drier than the Sahara. pic.twitter.com/qwR4q4ZAkh

— Elliott Z. Stein (@NYCStein) January 17, 2024

However, he referenced the recent SEC vs. Ripple case, where Ripple achieved a partial victory in July 2023. The judge ruled that XRP (XRP) is not considered a security when it comes to retail sales on cryptocurrency exchanges. 

Stein suggests the decision around securities, in this case, will have a domino effect on Coinbase’s lawsuit, too.

“As the Ripple ruling in July suggested, sales of digital assets on public exchanges don’t fit neatly into the Howey test for what constitutes an investment contract,” he argued.

Related: Crypto Biz: Coinbase vs. SEC case will determine crypto tokens fate

On Jan. 17, Cointelegraph reported that U.S. District Judge Katherine Polk Failla heard arguments from the SEC and Coinbase on the crypto exchange’s motion for dismissal over a period of five hours.

In a notable point for the crypto community, Failla asked the SEC attorneys to explain why a digital token issuance would meet the Howey test, arguing the case was “too broad.”

The SEC filed a lawsuit against Coinbase on June 6, 2023, alleging the crypto exchange violated federal securities laws.

The agency argued that 13 tokens listed on Coinbase were securities, including Solana’s (SOL), Cardano’s (ADA), Polygon’s (MATIC), Filecoin (FIL), The Sandbox (SAND), Axie Infinity (AXS), Chiliz (CHZ), Flow (FLOW), Internet Computer (ICP), Near (NEAR), Voyager (VGX), Dash (DASH) and Nexo (NEXO).

Magazine: Coinbase fights SEC in court, SBF’s parents seek lawsuit dismissal, and Bitcoin ETFs: Hodler’s Digest, Jan. 14-20