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Rulings on motions to dismiss, such as today’s, are not resolutions of factual disputes. When evaluating such motions, federal judges only dismiss a case if there is not plausible evidence that a law has been violated, even when assuming all facts alleged by a plaintiff to be true.
In today’s ruling, however, U.S. District Judge Kathleen Failla not only found most of the SEC’s claims against Coinbase fit for trial, but also indicated support for the agency’s broader, long standing argument about crypto: Many tokenized assets constitute securities schemes, and fall under the SEC’s purview.
“The ‘crypto’ nomenclature may be of recent vintage, but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years,” Judge Failla wrote.
On two major claims, Judge Failla allowed the SEC’s case against Coinbase to proceed: that Coinbase operates as an unregistered securities exchange for retail and institutional investors, and that its crypto staking programs constitute additional offerings of unregistered securities.
A third claim against Coinbase, however—that via the Coinbase Wallet, the company conducts brokerage activity—was dismissed by Judge Failla. The logic relied on by Failla to dismiss the claim was specific only to the legal definition of a brokerage and does little to aid Coinbase’s remaining case against the SEC.
On Twitter, Coinbase Chief Legal Officer Paul Grewal wrote that he was not surprised by today’s ruling.
https://twitter.com/iampaulgrewal/status/1772993916146479193
“We were prepared for this,” Grewal said. “Early motions like ours against a government agency are almost always denied. But clarity is the ultimate goal and today’s decision continues us on that path.”
The SEC’s case against Coinbase now proceeds to discovery. Judge Failla has instructed both parties to submit proposed case management plans by April 19.
When Coinbase argued the merits of its motion to dismiss the case in January, Failla appeared intrigued by arguments made by crypto industry advocates.
But her ruling today may have indicated not just trouble ahead for Coinbase, but for the crypto industry’s broader, ongoing battle against federal regulators.
Buried within Judge Failla’s 84-page judgment was a rejection of Coinbase’s claim that the SEC has violated federal law by failing to disclose its crypto policy. Earlier this week, the DeFi Education Fund sued the SEC on similar grounds.
“The SEC is not announcing a new regulatory policy,” Judge Failla wrote today, dismissing such arguments. “But rather is simply engaging in a fact-intensive application of an existing standard—an application that Coinbase also conducted—to determine whether certain transactions involving crypto-assets meet the characteristics of an ‘investment contract.’”
Edited by Stacy Elliott.