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Legal document review: Coinbase responds strongly to SEC allegations and seeks dismissal of the case.

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Coinbase rejects SEC's 10 arguments.

Original Title: "Full Analysis of Coinbase's 181-page Legal Document: Strong Response to SEC Lawsuit, Seeking Dismissal of Case"

Original Source: ODAILY Star Daily

The cryptocurrency exchange Coinbase has submitted a response and a motion to dismiss the case filed by the US Securities and Exchange Commission (SEC), addressing the regulator's allegations of operating an unregistered securities exchange. In the response, Coinbase maintains that the SEC's allegations lack merit and emphasizes that it underwent a thorough review of its business practices by the SEC prior to going public.

Coinbase's Chief Legal Officer, Paul Grewal, stated that the company has never listed securities and that their process for token listings is fully consistent with the SEC's review in early 2021. This response marks Coinbase's formal response to the legal dispute and signals the start of a long legal battle.

So what did Coinbase actually say in these two legal documents? How did they argue that the tokens traded on their platform are not securities? This article summarizes the main contents of the two documents.

Coinbase 对于驳回立案的申请

translates to

Coinbase's Rejection of Filing Application

This application was directly submitted to the judge by Coinbase, and the main request is to dismiss the case. After briefly introducing SEC's core allegations against Coinbase and its four targets: believing that Coinbase engages in spot and institutional trading, securities brokerage, wallet custody, and staking services, this document directly points to the core of this case, which is to determine whether digital currencies and staking services are "securities" in order to continue the debate on whether Coinbase meets the allegations. In the document, Coinbase succinctly summarizes:

"They (referring to digital currencies and assets) are not securities. Therefore, this case should be dismissed."

Regarding specific logical reasoning, Coinbase has systematically refuted the SEC's accusations based on the Howey case (the case that formed the Howey test).

First of all, it points out that according to the definitions of the US Securities Act and Securities Law, the term "securities" includes "instruments commonly known as 'securities'", one of which is "investment contracts". This concept was established in the Howey case 77 years ago, which refers to "any contract arrangement for the purpose of investing in an enterprise and obtaining profits through the efforts of the promoter". However, the transactions on the Coinbase platform and the Prime service are not of this type of contract, but asset sales, and the obligations of both parties are fulfilled when digital tokens are delivered in exchange for money. Unlike stocks and other securities, when these tokens are traded on Coinbase, there are no statutory or contractual rights (such as dividends) associated with them. Any purchaser on Coinbase cannot claim more than the right to acquire the tokens. Without this ongoing contractual relationship, the SEC's allegations cannot be established.

In addition, regardless of the expectations of Coinbase's buyers for the growth of their token's market value, this is not a requirement for profit, assets, or business management. Classic securities can be simple shares, constituting ownership of dividends and residual value of the enterprise; preferred shares, with interest and liquidation priority; bonds, bills, or other debt contracts, providing investors with fixed returns, and investment contracts, in which investors pay funds in exchange for contractual requirements for enterprise earnings. But there must be statutory rights to the enterprise. Since transactions on Coinbase do not involve such rights, they do not fall within the category of securities.

Even if SEC presents a credible claim that the transaction in question is an "investment contract," the "significant issues" doctrine requires dismissal of the complaint. As Congress has expressly recognized the lack of authority to regulate cryptocurrencies and is actively considering regulatory structures, SEC lacks the power to exercise "clear congressional authorization" over this trillion-dollar emerging industry.

Similarly, attacks on wallet and Coinbase's staking services are also unfounded. The SEC failed to charge that the tokens available in the wallet have key features of investment contracts, nor did it determine that the wallet function is a "broker" under securities law. As for the staking function, the facts stated in the indictment show that customers staking through Coinbase's software neither obtain shares of the enterprise through investment funds nor face loss risks by staking their own tokens, and what they receive is administrative rather than managerial services. Therefore, legally speaking, there is no investment contract.

This application was forwarded by Paul Grewal, Chief Legal Officer of Coinbase, and has also received a lot of attention on Twitter.

Coinbase's 177-page response to SEC's case allegations

In this 177-page response document, Coinbase refutes (or admits to some facts) all the terms in the SEC's lawsuit and further presents all the arguments and evidence that the SEC's lawsuit is unfounded.

Argument 1: When listed on Coinbase in 2021, it underwent a comprehensive review by the SEC, but the SEC did not raise any objections at that time.

According to the document, in April 2021, when Coinbase sought to go public, the U.S. Securities and Exchange Commission announced that Coinbase's registration statement was effective, allowing Coinbase's stock to be sold to millions of retail and institutional investors. This announcement came after "several months of discussions with Coinbase and extensive review and comment on Coinbase's registration statement." Coinbase opened up its business to the SEC, explaining its core businesses such as digital asset listing, trading and staking services, as well as self-custody wallet software, which were and still are core aspects of Coinbase's operations. In consideration of its mission to "serve the public interest and protect investors," the SEC allowed Coinbase to go public and never suggested that Coinbase had to register its business.

Argument 2: SEC has never classified digital assets as securities in the 2021 IPO review

Coinbase mentioned that the lawsuit filed by SEC this year accuses Coinbase of failing to register as a national securities exchange, broker, and clearing agency since 2019. Based on these accusations, SEC claimed that 12 out of the more than 240 tokens traded on Coinbase's spot exchange are "securities". At the time of the SEC's declaration of company registration effectiveness, 6 out of these 12 assets were already traded on Coinbase. However, SEC did not classify any of them as securities in 2021.

Coinbase then stated in the document that the SEC's change in attitude was not due to any substantial changes in Coinbase's business since 2021, nor did it mention any changes. It was not due to new information either. In its complaint, the SEC did not suggest that Coinbase had hidden anything during years of pre-IPO discussions. This reversal was also not due to legislative changes. Congress has considered and continues to actively consider multiple regulatory proposals regarding digital assets, but since April 2021, no law has been passed giving the SEC the power to regulate digital asset exchanges, let alone retroactive provisions. The only change in the entire process is the SEC's position on its authority. Legally, this position is untenable, and asserting it through this enforcement action violates the principles of due process and the separation of powers under the US Constitution.

论点 3 ：SEC 未必有权利监管加密行业，诉讼属于过度监管

Argument 3: SEC may not have the authority to regulate the cryptocurrency industry, and lawsuits may be considered excessive regulation.

As mentioned in the document, in May 2021, a few weeks after Coinbase went public, SEC Chairman Gensler testified before Congress that the committee lacked the statutory authority to regulate companies like Coinbase. He stated that only Congress could address the regulatory gaps that committee officials have long recognized, "because there is no regulatory framework for trading these crypto assets at the moment." He also emphasized that "these crypto exchanges have no market oversight agency."

Within the jurisdiction of the SEC, the assets traded on Coinbase's secondary market platform do not fall under the SEC's authority because, contrary to the SEC's assertion, they are not "investment contracts" and therefore not considered "securities". Like all securities, the definition of an investment contract only applies to economic arrangements involving a continuing enterprise with management obligations to investors. Without such obligations, the contract is merely an asset sale.

Due to Coinbase's secondary market trading not carrying such obligations, and the value obtained by Coinbase buyers through these transactions is related to the physical goods purchased and traded, rather than the enterprises that generate these goods, these transactions are not securities transactions. Chairman Gensler's testimony in May 2021 reflects this understanding. It echoes a basic "regulatory gap" acknowledged by SEC staff in an internal discussion made public in 2018, as well as the limitations of SEC's power in the digital asset field. Prior to the recent regulatory overreach by the SEC, no court had interpreted "investment contracts" to apply to independent asset sales, nor to any arrangements where the seller did not operate the business for the benefit of the buyer.

Argument 4: Digital assets, wallets, and staking functions are not securities, and the lawsuit is only the result of the SEC's expanded definition

Similar to the rejection of the case application with Coinbase, this document uses the same logic to explain why digital assets, wallets, and staking services are not securities and do not require registration.

Coinbase stated that the SEC has significantly expanded its definition of investment contracts, and therefore its regulatory power over digital assets, especially in the past year. It has done so by fiat, without any reason, and without congressional authorization. Even with Chairman Gensler pushing this agenda, Coinbase has repeatedly sought to engage with the agency to understand and respond to its new positions. Coinbase even submitted a rulemaking petition to the SEC in July 2022 to clarify which assets the Commission considers securities, among other issues. The petition has yet to receive a response.

论点 5 ：解释权应当属于国会，而非属于机构

Translation:

Argument 5: The power of interpretation should belong to Congress, not to institutions

Coinbase Explanation, the issue of "securities" claimed by the SEC is limited to specific types of investment contracts. Although the SEC's explanation may have some merit, the "major questions doctrine" requires rejecting the explanation while respecting Congress's power to choose how to regulate "important aspects of the American economy." This is because the courts "presume that Congress intended to make the critical policy decisions itself, rather than to delegate those decisions to agencies." When an agency claims to have discovered new power to regulate important aspects of the American economy in long-existing regulations, the courts will not accept the agency's "novel" legal interpretation without "clear congressional authorization," even if the interpretation is "reasonable" or "plausible."

Argument 6: Even if the SEC has regulatory authority, it needs to establish formal rule-making procedures instead of relying on a lawsuit

Coinbase claims that even if the SEC has the necessary legal authority, the institution's new interpretation of "investment contracts" needs to be established through formal rulemaking procedures. Announcing regulatory authority through punitive enforcement actions, rather than through notice and comment rulemaking procedures, is a violation of due process and an abuse of power by the institution, which is sufficient to reject the claimed rights.

Faced with the improper power claims by SEC to fill the existing regulatory gap, federal courts have recognized the confusion brought to market participants by SEC. As a court recently observed, "the regulatory agency itself seems unable to agree on whether cryptocurrencies are commodities subject to CFTC regulation, securities subject to securities laws, or neither, and cannot even agree on what standards should be applied to make that decision." As another court recently asked:

"From the Commission's perspective, why is it wise to entrust decisions with such far-reaching implications for a multi-billion dollar industry to a single federal district judge?"

Coinbase mentioned in the following section that SEC chose to push its aggressive agenda through punitive retrospective enforcement actions rather than testing its new views through notices and comment rulemaking. The enforcement power of institutions is important but not unlimited. SEC's actions here exceeded those limits and should be deemed illegal.

论点 7 ：SEC 未能给 Coinbase 任何的解释和共同合作机会，而选择直接起诉

Argument 7: The SEC did not provide any explanation or opportunity for cooperation to Coinbase, but chose to sue directly.

Coinbase illustrated this point with an example. On the same day that Coinbase submitted its application, the SEC filed a lawsuit against a 32-year-old former Coinbase employee and his brother - SEC v. Wahi - accusing them of using confidential information from Coinbase to make early purchases of nine tokens on the Coinbase platform under the guise of "securities" fraud. The US Department of Justice did not claim that these tokens were securities in its parallel action. However, the SEC did so, and the lawsuit did not mention Coinbase or any issuers or developers of the tokens involved.

Therefore, the interaction between SEC and Coinbase was not through any regulatory process, but through proxy litigation. Coinbase's asset listing decisions, its extensive compliance efforts, and years of interaction with SEC were left to heartless criminals (referring to Wahi) who were unprepared to defend themselves, and these criminals harmed the company. Faced with the defendant's motion to dismiss and the documents submitted by Coinbase and other friendly parties providing detailed support, which revealed that the lawsuit exceeded SEC's statutory authority and violated due process (the fundamental flaw raised by Coinbase in this case), SEC summarily terminated Wahi's lawsuit in a settlement without compensation and without admitting or denying guilt. This implies that SEC is trying to prove that the tokens traded on Coinbase are securities through another completely unrelated case, without giving Coinbase any opportunity to explain.

Coinbase believes that the SEC's enforcement approach is "retrospective responsibility" rather than "forward-looking guidance", which has led to a series of other enforcement actions. As these actions increase, SEC Commissioner Hester Pierce pointed out that "using enforcement actions to tell people what the law is in emerging industries is unfair", and she observed that "one-time enforcement actions and uniform analysis are not feasible".

论点 8 ：Gary Gensler 的话语前后矛盾

Argument 8: Contradiction in Gary Gensler's words.

In December 2022, Chairman Gensler told a reporter that he believed the SEC had enough power to fully regulate digital asset platforms. This is directly opposite to Chairman Gensler's previous view that Congress did not authorize the SEC to regulate digital platforms. However, no legal changes have occurred during this 18-month period. Mr. Gensler announced that digital asset platforms can and must immediately "come and talk to us and register". However, Coinbase has met with the SEC dozens of times and has submitted applications to the SEC through rulemaking because there are currently no existing rules to regulate the registration of digital asset securities and digital asset exchanges. The SEC itself has claimed that "the trading venues regulated by the SEC only involve securities". As some senior SEC officials have admitted, Bitcoin and Ethereum are commodities, not securities, so exchanges that trade both commodities and securities cannot be registered. This is also one of the reasons why Coinbase's listing process aims to avoid listing assets that the SEC may designate as securities based on its previous statements.

论点 9 ：Coinbase 一直期望合作，但却屡次被 SEC 拒绝

Translation:

Argument 9: Coinbase has always hoped to cooperate, but has been repeatedly rejected by the SEC

According to Coinbase, in late 2022 and early 2023, Coinbase will continue to work with the SEC. In more than ten demonstrations and more than 27 phone conversations, Coinbase shared its views on the possible structure of a registered digital asset securities trading platform with the SEC, as well as the feasibility of trading securities and non-securities on a single platform. The day before the planned meeting, which was originally intended for SEC staff to provide substantive responses to Coinbase for the first time, the staff canceled the meeting and informed Coinbase that they would instead take enforcement action.

On March 22, 2023, SEC staff issued a Wells notice, notifying Coinbase staff of their intention to recommend enforcement action against the company. The Wells notice was issued while Coinbase was still providing documents to the SEC and after staff had only taken testimony from two mid-level Coinbase employees. SEC did not disclose specific charges against Coinbase. During the Wells notice conference call, Coinbase asked directly: which assets traded on our platform are securities? Staff said they "had no way" of determining specific assets.

论点 10 ：SEC 在之前第三巡回法庭的强制令申请中模棱两可

Translation:

Argument 10: SEC was ambiguous in its previous Third Circuit Court's motion for a mandatory injunction

Before Coinbase, the SEC's application for a subpoena (requesting specific details on the allegations) filed in the Third Circuit Court of Appeals was completely contradictory in its statements.

Coinbase claims that the compulsory application was made against the background of "facing imminent law enforcement actions, the specific scope and timing of which are uncertain, and the SEC has not yet made a decision on the company's nine-month rule-making petition, let alone given any formal guidance on the basis of institutional regulatory expansion."

Coinbase is requesting that the Third Circuit Court of Appeals order the SEC to "explain on the record whether it intends to pursue a rulemaking to establish rules for others and potentially soon-to-be-charged Coinbase." The reason for seeking help is clear: the SEC is enforcing new, previously undisclosed standards for regulating digital assets that contradict previous statements by SEC officials and Coinbase's DPO process. As part of the proper administrative and due process, Coinbase has the right to know the basis for the SEC's newly claimed broad authority, or to challenge the SEC in court if it refuses to provide it.

In response to the petition for a compulsory order, the SEC was indecisive on May 15, 2023. It stated that it did not make a "secret decision to reject" Coinbase's petition. The SEC told the court that Coinbase's proposal was "unfounded." However, on the same day, Chairman Gensler expressed the opposite view in a public speech, stating that no additional guidance was needed as the rules had already been published.

Coinbase's response to the SEC's lawsuit details the company's position and perspective, claiming that it underwent a comprehensive review by the SEC before going public, complied with legal requirements, and adhered to business standards. This legal dispute will continue and may evolve into a long-term struggle. The debate between the two sides will determine the boundaries of responsibility between the cryptocurrency exchange industry and regulatory agencies, as well as the future direction of development.