U.S. State Regulators Intervene in Coinbase’s Unregistered Securities Case

• Coinbase is fighting a potentially existential case from federal regulators who argue it operated an unregistered securities exchange.
• Three new legal filings lend support to the SEC case, arguing it has the power to take on crypto.

Coinbase’s legal fight over the status of crypto met a new hurdle Tuesday, as U.S. state authorities and legal experts joined a campaign by federal securities regulators to argue the company unlawfully operated an unregistered exchange.

The Securities and Exchange Commission’s action against one of the country’s biggest crypto exchanges has been seen as existential for the future of crypto, with the sector accusing the agency of regulating by enforcement in the absence of new laws from the U.S. Congress.

Now, three new amicus briefs, which allow parties who are interested but not directly affected by the case to aid the court’s reasoning, argue crypto is neither significant nor special, and that the SEC can take on digital assets under existing law.

While Coinbase has sought to argue the SEC is exceeding its powers, the regulator’s legal position is neither novel nor remarkable, argued the North American Securities Administrators Association (NASAA).

“The SEC’s theory in this case is consistent with the agency’s longstanding public position” and “well within the bounds of established law,” said the filing by NASAA, a century-old body whose 68 members include securities regulators from all 50 U.S. states, adding that digital assets shouldn’t get special treatment.

“There is no practical economic use case identified or widely adopted for the vast majority of digital assets, other than speculation,” the filing said. “While they receive outsized attention from the media and regulators because they are aggressively marketed and fertile ground for fraud, that attention belies the very limited size and significance of this ‘industry’ in the context of the broader U.S. economy.”

A further brief filed by two academic administrative lawyers argued Coinbase was misguided in invoking a legal doctrine that prevents government agencies from making economically significant interventions without clear congressional authority.

“The major questions doctrine simply is irrelevant to this action,” because the Coinbase case concerns enforcement against a particular company rather than quasi-legislative rulemaking, said the filing by Todd Phillips of Georgia State University and Beau Baumann of Yale Law School. “Far from asserting new power to regulate the ‘national economy,’ the SEC brought a specific complaint in federal court.”

The Supreme Court recently broadened the major questions doctrine when it struck down President Joe Biden’s cancellation of student debt – but deploying it for crypto would be “absurd,” creating a different definition of securities for cases brought by private litigants rather than government agencies, the pair said.

Those pro-government filings were buttressed by the New Finance Institute, a public benefit corporation that operates two blogs on finance and financial empowerment, and which argued Congress intended investor protection measures to have a scope broader than merely capital-raising transactions.

“The purchasing of crypto tokens should not be characterized as investments due to the lack of cash flow generation (a long-established prerequisite for any true investment),” the NFI filing said. “Such purchases are still investment contracts, however, because the buying public is denied the full and fair disclosure that they are not investing.”

The SEC earlier this year took cases against a number of crypto exchanges, including Coinbase, Binance and Bittrex, arguing the native coins for blockchains such as Solana [SOL], Cardano [ADA], Polygon [MATIC] resembled conventional financial instruments.

Those have been flanked by state actions from the likes of Alabama, California and New Jersey. Coinbase has sought to have the federal case tossed, arguing crypto lies outside of the SEC’s jurisdiction.