Coinbase's legal team has approached U.S. District Judge Katherine Failla with a request to dismiss a previous ruling that defines secondary sales of crypto assets as securities transactions.
The petition, part of the ongoing legal dispute between Coinbase and the US Securities and Exchange Commission (SEC), was highlighted in a letter dated March 5.
Michael Savitt, who represents Coinbase, asserted that the SEC's previous classification of secondary market cryptocurrency sales as securities contracts, which was particularly noted in SEC v. Wahi, lacked substantive merit because it had not been thoroughly examined in court.
The background to this legal tangle goes back to July 2022, when the SEC filed a lawsuit against Ishaan Wahi, a former product manager at Coinbase, along with his brother Nikhil Wahi and their friend Sameer Ramani. The lawsuit centered around insider trading allegations linked to nine cryptocurrencies.
The Wahi defendants sought to have the charges dismissed, arguing that the tokens in question did not constitute “investment contracts” and were therefore beyond the reach of the SEC. Coinbase, among others, provided summaries to support this chapter.
However, prior to any decision on the dismissal, the SEC reached a settlement with the Wahi brothers in June 2023, which was concluded as a “zero dollar, no admission, no denial” agreement. Subsequently, the SEC entered a default judgment against Ramani, who failed to present his defense, thus accepting the SEC's position that the crypto assets in question were “investment contracts.”
Coinbase's lawyer, Savit, criticized this ruling against Ramani, arguing that it was made in the absence of any substantive legal debate and therefore should not be considered a precedent. “The writ was made against an empty chair and its reasoning reflects that,” Savit stated, stressing the need to exclude default judgment in the current proceedings.
This legal maneuver by Coinbase came after the SEC, on March 4, attempted to leverage the findings of the Wahi insider trading case to challenge Coinbase's position by highlighting that the tokens had been classified as securities in the court's decision at the time.
The ongoing dialogue between Coinbase and the SEC includes discussions about applying the Howey test, a standard stemming from a 1946 Supreme Court case, to determine whether cryptocurrency assets traded on the Coinbase platform are securities.
In June 2023, the SEC accused Coinbase of violating federal securities laws by listing 13 tokens that it claimed were securities.
Coinbase is now seeking an injunction to dismiss the lawsuit filed by the SEC, questioning the regulator's oversight of cryptocurrency exchanges.
Although Bitcoin has been recognized as a commodity since 2015, the regulatory status of other cryptocurrencies remains murky, presenting major challenges for centralized exchanges.
Under the leadership of Jay Clayton and Gary Gensler, the SEC has intensified its regulatory action against cryptocurrency companies, allegedly for offers or sales of unregistered securities. As legislation in regulating cryptocurrencies slowly advances, companies like Ripple, Binance, and Coinbase find themselves increasingly under scrutiny by the regulator.
