Coinbase conducted an unusual legal defense ahead of the SEC’s crackdown on cryptocurrencies

By Jody Godoy

(Reuters) – Months before cryptocurrency exchange Coinbase became the biggest target in the US crackdown on digital assets, the company launched an unusual legal offensive, recruiting top lawyers to try to frame court rulings in other cases.

Before the U.S. Securities and Exchange Commission sued Coinbase on June 6, the company had commented on two other crypto-related lawsuits brought by the regulator and asked judges to comment on unresolved legal issues that are now the focus of its own case.

In each case, Coinbase filed briefs as “amicus” or friend of the court.

According to law firm Gibson Dunn & Crutcher, while amicus briefs are common in the U.S. Supreme Court, they are filed in only 0.1% of cases in federal court, although crypto industry groups are filing an increasing number in support of defendants in SEC cases.

A ruling in favor of another crypto defendant at the trial court level would not bind Coinbase's own case, but the company could potentially point to it in its defense, legal experts said. The few judges who have previously ruled in similar cases have supported the SEC's approach.

Filing amicus briefs in court is about “rolling the stone in the right direction” on legal issues that the amicus care about, said Akiva Shapiro, one of the authors of the Gibson Dunn study.

Gibson Dunn is representing Coinbase as amicus in one of the cases.

SEC and Coinbase spokesmen declined to comment.

For years, the regulator has prosecuted developers for selling digital tokens without registering them. But more recently, the focus has shifted to the bigger players like exchanges to contain what SEC Chairman Gary Gensler has dubbed “the Old West.”

The SEC's biggest US target is now Coinbase, which it has sued in federal court in Manhattan. She accused the company of operating an unregistered exchange, broker, and clearing house, and said it compromised at least 13 of the crypto assets it made available to US investors, including Solana, Cardano, and Polygon to trade securities.

Paul Grewal, Coinbase's general counsel, told Reuters on the day the lawsuit was filed that the company was “absolutely committed to defending itself in court.”

LEGAL EXAMINATION

Coinbase began its broader legal forays last year after the SEC began its investigation, engaging major corporate defense law firms Gibson Dunn and Cahill Gordon & Reindel to file filings in the two cases.

In one case, the company asked US District Judge Tana Lin in Seattle to dismiss an SEC insider trading lawsuit against former Coinbase product manager Ishan Wahi.

Coinbase itself was not a defendant in this case.

Wahi and his brother settled with the SEC after pleading guilty to related criminal charges, so Lin never ruled.

The exchange's main argument in its amicus brief, which may pre-empt its defense in its own case, is that since many digital assets are not securities, the SEC does not have the power to monitor the space.

The company argued the SEC misapplied a legal test that says “a cash investment in a common enterprise whose profits are derived solely from the efforts of others” is a type of security called an investment contract.

Coinbase argued that the digital assets on its platform fail this test, in part because they lack contractual agreements.

The SEC has argued that the test – which has been applied to investments in everything from whiskey casks to chinchillas – depends on the economic realities of the transactions, not the labels assigned to them.

The regulator asked judges to focus on the way digital assets are marketed, citing promises from crypto developers that investors will benefit if their projects are successful.

“Fair Notice”

Coinbase also argued in its brief that the SEC had not established clear guidelines that would give cryptocurrency industry participants “fair information” that a given digital asset was a security prior to the lawsuit, which is a violation of their rights to due process under the US Constitution.

Gensler dismissed the argument, saying many companies in the space made a “calculated economic decision” to flout the rules.

In its other amicus brief, Coinbase asked a Manhattan federal judge to allow fair-notice defenses in the SEC's case against Ripple Labs, which was the industry's most contentious battle with the regulator prior to the Coinbase case.

The regulator filed a lawsuit in 2020, accusing the San Francisco-based blockchain company and its current and former directors of selling the cryptocurrency XRP, which Ripple's founders created in 2012, for an unregistered securities offering worth Having carried out $1.3 billion.

Coinbase argued with U.S. District Judge Analisa Torres that denying the Ripple defendants fair notice defense “would jeopardize the validity of the defense in future cases.”

More than a dozen other groups and market participants in the cryptocurrency industry have also submitted amicus briefs to convince Torres that XRP is not a security.

A verdict is expected later this year.

(Reporting by Jody Godoy in New York; Editing by Tom Hals in Wilmington, Delaware; Editing by Deepa Babington)

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