SEC vs Coinbase: Court Denies Unregistered Broker Allegation

In a significant legal development, the U.S. District Court for the Southern District of New York has issued a ruling that stands in stark contrast to the Securities and Exchange Commission’s (SEC) allegations against Coinbase Wallet. The court decisively rejected the SEC’s assertion that Coinbase Wallet functions as an unregistered brokerage service. Furthermore, Judge Katherine Polk Failla ruled against the SEC’s request to terminate Coinbase’s cryptocurrency staking program, marking a pivotal moment for the digital asset industry.

This judicial decision elucidates that Coinbase Inc. has indeed engaged in the sale and offering of securities, complying with U.S. law, thereby countering the SEC’s prior lawsuit which claimed otherwise. Judge Failla’s findings further articulate that Coinbase, under federal securities legislation, operates legitimately as an exchange, brokerage, and clearing agency. This includes its involvement through the staking program in the offering and sale of securities without registration.

The ruling notably favored Coinbase by partially approving its motion to dismiss the SEC’s lawsuit, which accused the company of regulatory violations. Judge Failla concurred with the defense, stating, “The Court agrees with Defendants that they are entitled to dismissal of the claim that Coinbase acts as an unregistered broker by making its Wallet application available to customers.”

The litigation commenced on June 6, 2023, with the SEC’s filing against Coinbase, arguing that the platform unlawfully merged the distinct functions of a broker, exchange, and clearing agency—a practice typically avoided in traditional financial markets. The lawsuit also scrutinized the Coinbase Earn staking program. Furthermore, the SEC contended that Coinbase’s failure to register deprived its clientele of critical safeguards such as regulatory oversight, adherence to record-keeping norms, and mechanisms to prevent conflicts of interest.

source