Coinbase Launched Unusual Legal Offensive Months Before US SEC Crackdown

Months before cryptocurrency exchange Coinbase became the biggest target of the US crackdown on digital assets, the company launched an unusual legal offensive, recruiting top lawyers to try to shape court rulings in other cases.

Before the US Securities and Exchange Commission sued Coinbase on June 6, the company had weighed in on two other crypto-related lawsuits brought by the regulator and urged judges to adopt views on open legal questions that are now at the heart of its own case.

In each case, Coinbase filed briefs as an "amicus," or friend of the court.

While common at the US Supreme Court, amicus briefs are filed in just 0.1 percent of cases in federal trial courts, according to law firm Gibson Dunn & Crutcher, although crypto industry groups have been filing an increasing number in SEC cases in support of defendants.

A ruling favoring another crypto defendant at the trial court level would not be binding on Coinbase's own case, but the company could potentially point to it in its defense, legal experts said. The few judges who have previously ruled in similar cases have endorsed the SEC's approach.

Filing amicus briefs in the trial court is about starting "the ball rolling in the right direction" on legal issues that the amicus cares about, said Akiva Shapiro, one of the authors of the Gibson Dunn study.

Gibson Dunn represents Coinbase as an amicus in one of the cases.

Spokespeople for the SEC and Coinbase both declined to comment.

For years, the regulator had pursued developers for selling digital tokens without registering them. But it has recently shifted focus to the bigger players like exchanges as it tries to corral what SEC Chairman Gary Gensler called "the Wild West."

The SEC's biggest US target is now Coinbase, which it sued in Manhattan federal court. It accused the company of operating an unregistered exchange, broker and clearinghouse, saying at least 13 of the crypto assets it made available to US investors, including Solana, Cardano and Polygon, were securities.

Paul Grewal, Coinbase's general counsel, told Reuters the day the case was filed that the company is "absolutely committed to defending itself in court."

Legal test

Coinbase began its broader legal push last year, after the SEC started investigating it, tapping major corporate defense law firms Gibson Dunn and Cahill Gordon & Reindel to file papers in the two cases.

In one instance, the company urged US District Judge Tana Lin in Seattle to dismiss an insider trading case brought by the SEC against former Coinbase product manager Ishan Wahi.

Coinbase itself was not a defendant in the case.

Wahi and his brother settled with the SEC after pleading guilty to related criminal charges, so Lin never ruled.

The exchange's main argument in its amicus brief, which could preview its defense in its own case, is that the SEC lacks authority to police the space because many digital assets are not securities.

The company argued the SEC has misapplied a legal test that says "an investment of money in a common enterprise with profits to come solely from the efforts of others," is a kind of security called an investment contract.

Coinbase argued the digital assets on its platform do not pass that test, in part because they lack contractual agreements.

The SEC has argued that the test — which has been applied to investments in everything from whiskey casks to chinchillas — depends on the economic realities of transactions, not the labels applied to them.

The regulator has urged judges to focus on the way digital assets are marketed, pointing to promises by crypto developers that investors will profit if their projects succeed.

'Fair notice'

Coinbase also argued in its brief that the SEC has not set clear guidelines that would give cryptocurrency industry participants "fair notice" that a particular digital asset is a security before suing, violating their right to due process under the US Constitution.

Gensler has been dismissive of the argument, saying many companies in the space had made a "calculated economic decision" to flout the rules.

In its other amicus brief, Coinbase urged a federal judge in Manhattan to allow the fair notice defense in the SEC case against Ripple Labs, which was the industry's highest-profile battle with the regulator prior to the Coinbase case.

The regulator sued in 2020, accusing the San Francisco-based blockchain company and its current and former chief executives of conducting a $1.3 billion (nearly Rs. 10,660 crore) unregistered securities offering by selling the crypto XRP, which Ripple's founders created in 2012.

Coinbase argued to US District Judge Analisa Torres that denying the Ripple defendants the fair notice defense "would jeopardize the validity of the defense in future cases."

More than a dozen other cryptocurrency industry groups and market participants have also filed amicus briefs to persuade Torres that XRP is not a security.

A ruling is expected this year.

© Thomson Reuters 2023