181-page Coinbase Legal Document Overview: Strong Response to SEC Lawsuit, Seeking Dismissal of the Case

Author: jk, Odaily Planet Daily

Cryptocurrency exchange Coinbase has submitted a response document and a motion to dismiss in its lawsuit against the U.S. Securities and Exchange Commission (SEC), addressing the regulator's allegations of operating an unregistered securities exchange illegally. In this response document, Coinbase asserts that the SEC's allegations are unfounded and emphasizes that it underwent a thorough review of its business practices by the SEC prior to its public listing. Coinbase's Chief Legal Officer Paul Grewal stated that the company never listed securities and that their process for listing tokens was entirely consistent with the SEC's review in early 2021. This response document marks Coinbase's formal reply to this legal dispute, signaling the onset of a lengthy legal battle.

So what exactly did Coinbase convey in these two legal documents? How did it argue that the tokens traded on its platform are not securities? This article outlines the main points from the two documents.

1. Coinbase's Motion to Dismiss

This motion was submitted directly to the presiding judge of the case by Coinbase, primarily seeking to dismiss the lawsuit outright. After briefly introducing the SEC's core allegations against Coinbase and its four main objectives—claiming that Coinbase engages in spot and institutional trading, securities brokerage, wallet custody, and staking services—the document directly addresses the crux of the case: whether digital currencies and staking services should be classified as "securities" to continue the debate over whether Coinbase is in violation of the allegations. In the document, Coinbase succinctly summarizes: "They (referring to digital currencies and assets) are not securities. Therefore, this case should be dismissed."

In terms of specific logical arguments, Coinbase systematically refuted the SEC's allegations based on the Howey case (the case that formed the basis for the Howey test).

It first pointed out that according to the definitions in U.S. securities law, the term "security" includes "a tool commonly referred to as a 'security'," one of which is an "investment contract." This concept was established in the Howey case 77 years ago, where "investment contract" refers to "any contractual arrangement for the purpose of investing in a business and obtaining profits through the efforts of the promoter." However, the transactions on the Coinbase platform and its Prime services do not fall under this type of contract; rather, they are asset sales, and the obligations of both parties are fulfilled when the digital tokens are delivered in exchange for money. Unlike stocks and other securities, there are no statutory or contractual rights (such as dividends) associated with these tokens when traded on Coinbase. Any purchaser on Coinbase cannot claim rights beyond acquiring the tokens. Without such a continuous contractual relationship, the SEC's allegations cannot stand.

Furthermore, regardless of any additional expectations Coinbase's purchasers may have regarding the appreciation of their tokens, this does not constitute a requirement for profits, assets, or management. Classic securities can be simple shares, representing ownership of dividends and residual value of the company; preferred shares, which come with interest and liquidation preferences; bonds, notes, or other debt contracts, which provide fixed returns to investors; and investment contracts, where investors pay funds in exchange for contractual claims on the company's earnings. However, there must be a statutory interest in the company. Since transactions on Coinbase do not involve such interests, they do not fall under the category of securities.

Even if the SEC presented a credible claim that the transactions in question are "investment contracts," the "major questions" doctrine also requires dismissal of the complaint. Congress has explicitly acknowledged that it has not delegated authority to regulate cryptocurrencies and is actively considering regulatory frameworks, thus the SEC lacks the power to exercise "clear congressional authorization" over this trillion-dollar emerging industry.

Similarly, the attacks on wallets and Coinbase's staking services are also unfounded. The SEC failed to allege that the tokens available in the wallet possess the key characteristics of an investment contract, nor did it establish that the wallet function qualifies as a "broker" under securities law. Regarding the staking function, the facts stated in the complaint indicate that customers staking through Coinbase's software are neither acquiring shares in a business through invested funds nor facing loss risks by staking their tokens; instead, they receive administrative rather than managerial services, thus legally, there is no investment contract.

This motion was shared on Twitter by Coinbase's Chief Legal Officer Paul Grewal himself and garnered significant attention on the platform.

2. Coinbase's 177-Page Response to the SEC's Allegations

In this 177-page response document, Coinbase refutes (or acknowledges certain facts) all the allegations made by the SEC in its complaint, further presenting all arguments and evidence that the SEC's reasons for the lawsuit are unfounded.

Argument 1: Coinbase Was Subject to Comprehensive SEC Review When It Went Public in 2021, and the SEC Did Not Raise Any Objections at That Time

According to the document, when Coinbase sought to go public in April 2021, the SEC 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 "months of extensive discussions and reviews of Coinbase's registration statement." Coinbase opened its business to the SEC, explaining its core operations, including digital asset listings, trading, staking services, and self-custody wallet software, which were and remain central to Coinbase's operations. In consideration of its mission to "protect the public interest and investors," the SEC allowed Coinbase to conduct its public offering and never implied that Coinbase needed to register its business.

Argument 2: The SEC Never Determined That Digital Assets Were Securities During the 2021 Listing Review

Coinbase points out that the SEC's lawsuit alleges that Coinbase has failed to register as a national securities exchange, broker, and clearing agency since 2019. The SEC bases this allegation on the claim that 12 of the more than 240 tokens traded on its spot exchange are "securities." At the time the SEC announced the effectiveness of the company's registration statement, 6 of these 12 assets were already trading on Coinbase. However, the SEC did not classify any of them as securities in 2021.

Coinbase then states in the document that the SEC's change in stance is not due to any substantial changes in Coinbase's business since 2021, nor does it mention any changes. It is also not due to new information. In its complaint, the SEC does not suggest that Coinbase concealed anything during years of collaborative discussions prior to becoming a public company. This reversal is not due to legislative changes. Congress has considered and continues to actively consider multiple regulatory proposals regarding digital assets, but since April 2021, no laws have been passed that grant the SEC the authority to regulate digital asset exchanges, let alone retroactively impose regulations. The only procedural change has been the SEC's position regarding its authority. Legally, this position is untenable, and asserting this position through enforcement actions infringes upon due process and the principle of separation of powers in the U.S. Constitution.

Argument 3: The SEC May Not Have the Authority to Regulate the Crypto Industry; the Lawsuit Represents Overreach

The document mentions that in May 2021, just weeks after Coinbase went public, SEC Chairman Gary Gensler testified before Congress that the commission lacked statutory authority to regulate businesses like Coinbase. He stated that only Congress could address the regulatory gap that the commission officials had long recognized, "because there is currently no regulatory framework for trading these crypto assets." He also emphasized that "these crypto exchanges have no market regulator."

Within the SEC's jurisdiction, the assets traded on Coinbase's secondary market do not fall under the SEC's authority because, contrary to the SEC's assertions, they are not "investment contracts," and therefore not "securities." Like all securities, an investment contract can only be defined in the context of an economic arrangement involving ongoing obligations of management to investors. Without such obligations, the contract is merely an asset sale.

Since there are no such obligations in Coinbase's secondary market transactions, and the value obtained by Coinbase purchasers through these transactions is related to the physical assets being bought and traded, rather than the businesses generating those assets, these transactions are not securities transactions. Chairman Gensler's testimony in May 2021 reflects this understanding. It echoes the basic "regulatory gap" acknowledged by SEC staff in publicly released internal discussions in 2018, as well as the limitations of the SEC's authority in the digital asset space. Prior to the SEC's recent overreach, no court had interpreted "investment contracts" as applicable to independent asset sales, nor to arrangements where the seller does not operate a business for the benefit of the buyer.

Argument 4: Digital Assets, Wallets, and Staking Functions Are Not Securities; the Lawsuit Is Merely a Result of the SEC's Expanded Definition

Similar to Coinbase's motion to dismiss, this document uses the same logic to explain why digital assets, wallets, and staking services are not securities and do not require registration.

Coinbase states that particularly in the past year, the SEC has significantly expanded its definition of investment contracts, thereby extending its own authority to regulate digital assets. It has done so through command without justification and without congressional authorization. Even as Chairman Gensler has pushed this agenda, Coinbase has repeatedly sought to engage with the agency to understand and respond to its new position. Coinbase even submitted a rulemaking petition to the SEC in July 2022 to clarify which assets the commission considers securities. This petition has yet to receive a response.

Argument 5: The Authority to Interpret Should Reside with Congress, Not with the Agency

Coinbase explains that the SEC's claims regarding "securities" are limited to specific types of investment contracts. While the SEC's interpretation may have some reasonableness, the "major questions doctrine" requires rejecting that interpretation while respecting Congress's authority to choose how to regulate "important parts of the U.S. economy." This is because courts "presume that Congress intends to make significant policy decisions itself, rather than leaving those decisions to agencies." When an agency "claims to have discovered new authority to regulate important parts of the U.S. economy within long-standing regulations," courts will not accept the agency's "novel" legal interpretations without "clear congressional authorization," even if such interpretations are "reasonable" or "plausible."

Argument 6: Even If the SEC Has Regulatory Authority, It Must Go Through Formal Rulemaking Procedures, Not a Lawsuit

Coinbase claims that even if the SEC possesses the necessary statutory authority, the agency's new interpretation of "investment contracts" must go through formal rulemaking procedures. Announcing so-called regulatory authority through punitive enforcement actions, rather than through notice-and-comment rulemaking, is a violation of due process and constitutes an abuse of power by the agency, which is sufficient to reject the claimed authority.

In the face of the SEC's improper assertion of power to fill existing regulatory gaps, federal courts have recognized the confusion the SEC has caused for market participants. As one court recently observed, "the agency itself seems unable to agree on whether cryptocurrencies are commodities potentially subject to CFTC regulation, securities subject to securities laws, or neither, or even what standards should apply to make that determination." As another court recently asked, "From the commission's perspective, why is it wise to leave such a far-reaching decision in a multi-billion dollar industry to a single federal district judge?"

Coinbase writes in subsequent sections that the SEC has chosen to advance its aggressive agenda through punitive retroactive enforcement actions rather than through notice-and-comment rulemaking to test its new views. The agency's enforcement powers are significant but not unlimited. The SEC's actions here exceed those boundaries and should be deemed unlawful.

Argument 7: The SEC Failed to Provide Coinbase with Any Explanation or Opportunity for Collaboration, Choosing Instead to Sue Directly

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

Thus, the interaction between the SEC and Coinbase was not conducted through any regulatory process but rather through proxy litigation, leaving Coinbase's asset listing decisions, its extensive compliance efforts, and years of interaction with the SEC to be defended by unprepared, unsympathetic criminals (referring to Wahi) who harmed the company. In the face of the defendants' motion to dismiss and the documents submitted by Coinbase and other amici providing detailed supporting documents, which revealed that the lawsuit exceeded the SEC's statutory authority and violated due process (a fundamental flaw Coinbase raised again in this case), the SEC summarily ended the Wahi lawsuit in a no-fault, no-admission settlement. This part subtly implies that the SEC attempted to prove that the tokens traded on Coinbase are securities through another case it did not want to engage in, without giving Coinbase any opportunity for explanation.

Coinbase believes that the SEC's method of enforcement is "retrospective liability," rather than "prospective guidance," followed by a series of other enforcement actions. As these actions increased, SEC Commissioner Hester Pierce pointed out that "using enforcement actions to tell people what the law is in an emerging industry is unfair," noting that "one-off enforcement actions and one-size-fits-all analysis do not work."

Argument 8: Gary Gensler's Statements Are Contradictory

In December 2022, Chairman Gensler told a reporter that he believed the SEC had sufficient authority to comprehensively regulate digital asset platforms. This directly contradicts Chairman Gensler's earlier acknowledgment that Congress had not authorized the SEC to regulate digital platforms. During these 18 months, there have been no changes in the law. However, Mr. Gensler announced that digital asset platforms could and must "come in and talk to us and register" immediately. Yet Coinbase has met with the SEC dozens of times and submitted applications through rulemaking precisely because there are currently no existing rules to regulate digital asset securities and the registration of 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 acknowledged, Bitcoin and Ethereum are commodities, not securities, thus exchanges trading both commodities and securities cannot register. This is also one of the reasons why Coinbase's listing process is designed to avoid listing assets that the SEC might designate as securities based on its previous statements.

Argument 9: Coinbase Has Always Sought Collaboration but Has Been Repeatedly Rejected by the SEC

According to Coinbase, at the end of 2022 and the beginning of 2023, Coinbase continued to collaborate with the SEC. In more than a dozen presentations and over 27 phone communications, Coinbase shared its views with the SEC on the potential structure for registering digital asset securities trading platforms and the feasibility of trading both securities and non-securities on a single platform. Just a day before a scheduled 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, informing 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. The SEC did not disclose the specific allegations against Coinbase. During the conference call regarding the Wells notice, Coinbase directly asked: which assets traded on our platform are securities? The staff stated they had "no way" to identify specific assets.

Argument 10: The SEC's Statements Regarding the Previous Third Circuit Court's Injunction Application Were Ambiguous

In the injunction application previously filed by Coinbase in the Third Circuit Court (requesting the SEC to provide specific clarifications regarding the allegations), the SEC's statements were contradictory. Coinbase claims that the injunction application was made in the context of "facing impending enforcement action, with the specific scope and timing uncertain, and the SEC has yet to decide on the nine-month-old rulemaking petition already submitted by the company, let alone provide any formal guidance regarding the agency's new regulatory expansion."

Coinbase requests that the Third Circuit Court order the SEC "to clarify on the record whether it will initiate proceedings to establish rules that may soon be applied to Coinbase." The reason for seeking help is clear: the SEC is enforcing new, previously undisclosed regulatory standards for digital assets that contradict previous statements by SEC officials and Coinbase's DPO process. As part of appropriate administrative procedures and due process, Coinbase has the right to know the basis for the SEC's claims of its newly discovered broad authority, or if the SEC refuses to provide it, to challenge the SEC in court.

In response to the injunction petition, the SEC hesitated on May 15, 2023. It stated that it had not "secretly decided to deny" Coinbase's petition. The SEC told the court that Coinbase's suggestions were "unfounded." However, in a public statement on the same day, Chairman Gensler expressed the opposite view, stating that no additional guidance was needed, as rules had already been published.

Coinbase's legal response to the SEC's lawsuit details the company's position and viewpoint, claiming that it underwent comprehensive SEC review before going public, meeting legal requirements and adhering to business norms. This legal dispute will continue and may evolve into a long-term struggle. The debate between both parties will determine the boundaries of responsibilities and future directions between the cryptocurrency exchange industry and regulatory agencies.