Months before cryptocurrency exchange Coinbase became the biggest target of the US crackdown on digital assets, the company launched an unusual legal offensive, enlisting top lawyers to try to shape court decisions in other cases.
Before the U.S. Securities and Exchange Commission sued Coinbase on June 6, the company had assessed two other crypto-related lawsuits filed by the regulator and urged judges to adopt views on open legal issues that are now at the heart of its own case.
In each case, Coinbase filed petitions as “amicus” or friend of the court.
While common on the U.S. Supreme Court, amicus briefs are filed in just 0.1% of cases in federal courts, according to law firm Gibson Dunn & Crutcher, although crypto industry groups have filed an increasing number of SEC cases in support of defendants.
A decision favoring another crypto defendant at the lower court level would not be binding on Coinbase’s own case, but the company could point to it in its defense, legal experts said. The few judges who have tried similar cases have endorsed the SEC’s approach.
Filing amicus briefs in the trial court is about “getting the ball rolling in the right direction” on legal issues that the amicus cares about, said Akiva Shapiro, one of the authors of the Gibson Dunn study.
Gibson Dunn represents Coinbase as an amicus in one of the cases.
Spokespersons for the SEC and Coinbase declined to comment.
For years, the regulator hounded developers for selling digital tokens without registering them. But it has recently shifted its focus to the bigger players, like purses, as it tries to corner what SEC Chairman Gary Gensler has called “the wild west.”
The SEC’s biggest US target right now is Coinbase, which has sued in federal court in Manhattan. He accused the company of operating an unregistered exchange, brokerage and clearing house, saying that at least 13 of the crypto assets it made available to US investors, including Solana, Cardano and Polygon, were securities.
Paul Grewal, Coinbase’s general counsel, told Reuters on the day the case was filed that the company is “absolutely committed to defending itself in court”.
cool test
Coinbase began its broader legal effort last year after the SEC began investigating it, calling on top corporate defense law firms Gibson Dunn and Cahill Gordon & Reindel to file documents in both cases.
In one case, the company urged U.S. District Judge Tana Lin in Seattle to dismiss an insider trading case filed by the SEC against former Coinbase product manager Ishan Wahi.
Coinbase itself was not a defendant in the case.
Wahi and his brother settled with the SEC after pleading guilty to related criminal charges, so Lin never decided.
The exchange’s main argument in its amicus brief, which could provide for its defense in its own case, is that the SEC lacks the authority to police the space because many digital assets are not securities.
The company argued that the SEC misapplied a legal test that says “an investment of money in a joint venture with profits derived solely from the efforts of others” is a type of security called an investment contract.
Coinbase has argued that the digital assets on its platform fail this test, in part because they lack contractual agreements.
The SEC argued that the test — which has been applied to investments in everything from whiskey barrels to chinchillas — depends on the economic realities of the transactions, not the labels applied to them.
The regulator urged judges to focus on how digital assets are traded, pointing to crypto developers’ promises that investors will profit if their projects are successful.
‘Fair Warning’
Coinbase also argued in its brief that the SEC failed to set clear guidelines that would give crypto industry participants “fair notice” that a given digital asset is a security before suing, violating their right to due process under the U.S. Constitution.
Gensler dismissed the argument, saying many companies in the industry made a “calculated economic decision” to flout the rules.
In its other amicus brief, Coinbase urged a federal judge in Manhattan to allow the fair notice defense in the SEC’s case against Ripple Labs, which was the industry’s highest-profile battle with the regulator prior to the Coinbase case.
The regulator sued in 2020, accusing the San Francisco-based blockchain company and its current and former chief executives of conducting a $1.3 billion (nearly Rs. 10,660 crore) unregistered bond offering by selling the XRP cryptocurrency, which Ripple’s founders created in 2012.
Coinbase argued with U.S. District Judge Analisa Torres that denying Ripple’s defendants the fair notice defense “would jeopardize the validity of the defense in future cases.”
More than a dozen other cryptocurrency industry groups and market participants have also filed amicus briefs to persuade Torres that XRP is not a security.
A decision is expected later this year.
© Thomson Reuters 2023