A pre-motion hearing between the Securities and Exchange Commission (SEC) and cryptocurrency exchange Coinbase is set to take place on July 13. Legal sources predict that this hearing will provide insight into the litigation tone and the potential impacts it may have on the broader crypto industry. Previously scheduled for August, the conference is a customary request made by any party seeking a ruling on a specific matter before the trial. In this case, Coinbase filed a motion in late June requesting Judge Katherine Polk Faila to dismiss the complaint filed against them by the regulator on June 5.
As the first hearing between the parties, the conference is expected to be primarily procedural and administrative in nature. Mark Kornfield, a securities and regulatory attorney, explains that Coinbase will likely argue for the early dismissal of the case on various grounds. One such argument may be that the tokens in question are not securities under the Howey test, thereby asserting that the SEC has overstepped its jurisdictional authority.
In response to Coinbase’s motion, the SEC issued strong criticisms against the exchange. They alleged that Coinbase was aware of possible violations of securities laws and accused them of “ignoring more than 75 years of controlling law under Howey” in an attempt to create their own test for defining an investment contract. Coinbase, in their motion, referenced their initial public offering (IPO) in 2021 and claimed that the SEC is now seeking charges for activities that were publicly disclosed in previous years.
Though the SEC may be aware of Coinbase’s business activities, this knowledge alone may not be sufficient to win the case in court. Corporate and securities lawyer Roland Chase explains that federal securities laws relevant to the IPO process are disclosure-based. The SEC’s role is limited to reviewing the going public documents, providing comments, and asking questions to improve the company’s disclosure to potential investors. Coinbase had reported to the SEC that it would subject each asset to a comprehensive legal analysis before allowing it to be traded on its platform, with the intention of ensuring that securities were not being traded. Chase clarifies that the SEC approved Coinbase’s IPO after reviewing the disclosure, but now believes that Coinbase is trading securities on its platform and offering its own unregistered securities.
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Without an agreement reached by both parties, this legal battle may take years to be resolved, as seen in the ongoing legal dispute between Ripple and the SEC. Ripple has been entangled in a legal battle since 2020 when the SEC deemed their token XRP to be a security. Ripple CEO Brad Garlinghouse recently criticized the SEC, stating that they have deliberately created confusion about the rules and have exploited this uncertainty through enforcement actions.
The outcome of the pre-motion hearing on July 13 will provide valuable insights into the future trajectory of the case and its potential impact on the crypto industry. The arguments presented by Coinbase and the SEC will shape the subsequent legal proceedings and determine whether the case will proceed to a trial or potentially be dismissed. Given the significance of this case and its potential implications for the broader crypto industry, legal experts anticipate close scrutiny and continued attention from both market participants and regulatory authorities.
