Coinbase, the leading cryptocurrency exchange, took an unusual legal approach before facing the U.S. Securities and Exchange Commission’s (SEC) crackdown on digital assets.
The company enlisted top lawyers to influence court rulings in other crypto-related cases, aiming to shape the legal landscape in its favor.
Prior to the SEC’s lawsuit against Coinbase on June 6, the company had submitted amicus briefs, or “friend of the court” briefs, in two other lawsuits initiated by the regulator.
By doing so, Coinbase expressed its views on legal matters that are now central to its own case. While amicus briefs are common at the U.S. Supreme Court, they are filed in only 0.1% of cases in federal trial courts.
However, the number of such briefs in SEC cases has been increasing, with crypto industry groups showing support for defendants.
Although a ruling favoring another crypto defendant in a trial court would not be legally binding for Coinbase’s case, the company could potentially use it as part of its defense strategy.
Few judges who have ruled on similar cases in the past have sided with the SEC’s approach.
Filing amicus briefs in trial courts allows the amicus to influence the direction of legal issues they care about.
It sets the stage for future discussions and considerations, as explained by Akiva Shapiro, one of the authors of a study conducted by law firm Gibson Dunn.
In recent times, the SEC has shifted its focus from targeting developers who sell unregistered digital tokens to larger players like exchanges. SEC Chairman Gary Gensler referred to the cryptocurrency industry as the “Wild West” and emphasized the need to regulate it.
Coinbase has become the primary target of the SEC, which sued the company in a Manhattan federal court. The SEC accused Coinbase of operating an unregistered exchange, broker, and clearinghouse, claiming that at least 13 of the crypto assets offered to U.S. investors were securities.
Coinbase initiated its legal offensive last year after being investigated by the SEC. The company engaged major corporate defense law firms, Gibson Dunn and Cahill Gordon & Reindel, to file briefs in two separate cases.
In one instance, Coinbase requested the dismissal of an insider trading case brought by the SEC against a former Coinbase product manager.
The main argument in Coinbase’s amicus brief, which could foreshadow its defense in its own case, is that the SEC lacks the authority to regulate many digital assets since they are not securities.
The SEC, on the other hand, argues that the determination of securities depends on the economic realities of transactions, not just the labels attached to them.
The regulator has urged judges to consider the way digital assets are marketed and the promises made to investors regarding potential profits.
Coinbase also raised concerns about the lack of clear guidelines from the SEC, arguing that industry participants need “fair notice” before a particular digital asset is deemed a security.
SEC Chairman Gensler dismissed this argument, stating that companies in the crypto space have knowingly chosen to disregard regulations.
In another amicus brief, Coinbase supported the fair notice defense in the SEC’s case against Ripple Labs, a prominent battle between the industry and the regulator prior to the Coinbase lawsuit.
The SEC sued Ripple Labs in 2020, alleging that the company conducted an unregistered securities offering worth $1.3 billion through the sale of the cryptocurrency XRP.
Coinbase argued that denying the fair notice defense to Ripple Labs would have implications for future cases.
Several other cryptocurrency industry groups and market participants have also filed amicus briefs in support of Ripple Labs.
A ruling on the Ripple case is expected later this year.
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