Earlier this month, blockchain payments firm Ripple unleashed the controversial Hinman emails as a key aspect of a defensive plan designed at putting the SEC on the back foot.
And these documents could not only help the XRP originator evade a billion-dollar suit but also help another crypto giant in the SEC’s crosshairs: Coinbase, the biggest digital asset exchange in the United States.
Coinbase has filed a motion to dismiss the SEC’s complaint. In the legal document on June 29, the exchange’s legal team cited the infamous Hinman emails to highlight a major “regulatory gap” and “greater confusion” regarding the rules in the crypto market.
Coinbase Denies SEC Jurisdiction
Coinbase has filed its first legal response to SEC’s lawsuit.
In its answer filed Thursday with the U.S. District Court for the Southern District of New York, Coinbase voiced concerns about the SEC violating its due process and reaching beyond its legal authority. Coinbase’s chief legal officer Paul Grewal tweeted on Thursday, saying that the SEC’s claims in the suit “go far beyond existing law” and should, therefore, be dismissed.
According to Coinbase, the 12 digital tokens considered as securities in SEC’s complaint are not “investment contracts,” hence the assets don’t qualify as securities under the Howey Test.
The exchange’s lawyers note that without a “contractual undertaking” to yield profits or a business whose “management owes enforceable obligations to investors,” it’s just an “asset sale” and cannot be deemed an “investment contract.”
Coinbase further argued that the SEC was fully aware of the exchange’s listing processes for crypto tokens and did not express any disapproval before lodging the lawsuit. Moreover, six of the 12 coins now under dispute were already being traded on the exchange when the SEC affirmed the effectiveness of the company’s registration statement.
Coinbase’s motion also notes that the SEC’s current Chair, Gary Gensler changed his position on the regulator’s authority over crypto toward the end of 2022. Gensler testified before Congress in May 2021 saying that “only Congress” can address the gap in regulating crypto assets as “there is not a market regulator around these crypto exchanges.” But by the end of 2022, the SEC boss had determined that his agency had “enough authority” to bring enforcement actions.
“Even if the SEC were correct that the assets and services it identifies are within the scope of its existing regulatory authority, this [legal] action must be dismissed on independent grounds that it violates Coinbase’s due process rights and constitutes an extraordinary abuse of process,” Coinbase’s legal team wrote in the filing.
Coinbase’s Motion To Dismiss Has “Real Teeth”: Pro-XRP Lawyer
XRP holders’ attorney John E Deaton noted that Coinbase’s argument had “real teeth” while pointing out some compelling points to buttress his point.
For starters, Deaton pointed out that the U.S. Congress has commenced the process of legislation for the crypto industry, which is a sign that lawmakers are finally ready to address the core issues raised. The CryptoLaw founder then mentioned the regulatory gap argument that was publicized through the Hinman emails in the XRP v. SEC case, which also gave Coinbase a stronger defense.
Deaton also believes Gensler’s previous acknowledgement that there is no clear rulebook developed for the crypto assets ecosystem can also strengthen the exchange’s case.
At the heart of the Coinbase lawsuit is whether the exchange sold some assets as investment contracts. Speaking on this, the attorney observed that there has never been a case in the past where the court declared that assets purchased at the secondary market were an investment contract. Moreover, there is not even one case in history where the judge has found an investment contract when there was no connection between the issuer and the buyer.
While he believes the motion is strong, Deaton clarified that it does not mean the presiding judge will grant it. In other words, Coinbase’s motion isn’t “your garden variety motion to dismiss where denial can easily be predicted.”