The U.S. Securities and Exchange Commission (SEC) has been threatening to sue Coinbase over alleged securities law violations. However, according to lawyer James Murphy, the SEC will likely lose the case due to a “fatal flaw” in the regulator’s argument. The key problem, says Murphy, is that SEC Chairman Gary Gensler has publicly stated that the SEC does not have the authority to regulate crypto exchanges. This could be a major issue if the SEC does decide to take Coinbase to court.
Murphy explained his reasoning in a series of tweets. He argued that Gensler’s testimony to Congress on May 6, 2021, in which he stated that the SEC lacks the authority to regulate crypto exchanges, will be a significant hurdle for the regulator if it presses ahead with legal action against Coinbase. Murphy contends that Coinbase’s legal team would likely focus on the communications within the SEC leading up to Gensler’s testimony, which he says will reveal that there was a consensus within the regulator that it lacked the legal authority to regulate crypto exchanges.
Furthermore, Murphy stressed that any reversal in Gensler’s position would be highly damaging to the SEC’s case. Gensler recently claimed that the SEC does have the authority to regulate crypto exchanges, despite his prior statement to Congress. According to Murphy, the “bizarre 180-degree reversal” makes Gensler himself the “star witness” for Coinbase. In this scenario, the SEC would need to defend its own chairman’s change of position on the matter.
Murphy closed his argument by concluding that if the SEC does decide to sue Coinbase, it would be “a highly embarrassing prospect” for the regulator. Coinbase, for its part, has not yet commented on the potential legal action.
Coinbase has been the focus of regulatory scrutiny on various occasions. Earlier this year, the company went public through a direct listing on the Nasdaq stock exchange. Not long after its debut, Coinbase was sent a Wells Notice by the SEC. This notice is essentially a warning that the regulator plans to sue a company for violating securities laws. Coinbase then revealed that it had delayed its plans to launch a crypto lending product after it received a similar threat from the SEC. The regulator has not yet taken any legal action against the company, but it has made it clear that it is monitoring the crypto industry closely.
The SEC has not yet responded to Murphy’s criticism of its case against Coinbase. However, it is not uncommon for legal experts to disagree over the merits of a case before it goes to court. It remains to be seen whether the SEC will press ahead with its allegations against Coinbase or back down in light of Murphy’s argument. In any case, the issue highlights the ongoing debate over how crypto exchanges should be regulated and what role the SEC should play in this process.