Coinbase, SEC set to face off in federal court over regulator’s crypto authority

(Reuters) – Coinbase will argue at a court hearing on Wednesday that the U.S. securities regulator should drop its case against it because the tokens traded on its crypto exchange are not akin to securities, said a person familiar with the case and court filings.

The hearing is the next major development in a closely watched court battle between Coinbase and the Securities and Exchange Commission that is likely to have implications for digital assets since it could clarify the SEC’s jurisdiction over the sector. Coinbase’s plan is to lean on a core argument it has made in court filings: that the SEC is overreaching and the assets it lists for trading are not securities.

Coinbase, the world’s largest publicly traded cryptocurrency exchange, is expected to argue that crypto assets differ from assets such as stocks or bonds that are subject to oversight by the U.S. securities regulator and that the SEC has overstepped its authority. Other crypto firms have expressed similar views.

The SEC sued Coinbase in June, saying the firm facilitated trading of at least 13 crypto tokens that should have been registered as securities and was operating illegally as a national securities exchange, broker and clearing agency without registering with the regulator.

The SEC also targeted Coinbase’s “staking” program, in which it pools assets to verify activity on blockchain networks and takes commissions, in exchange for “rewards” to customers. It said that program should have been registered with the agency.

The lawsuit is one of a slew the SEC has brought against the crypto sector under the premise that many crypto assets are securities. The agency focused initially on companies selling digital tokens, but under the leadership of chair Gary Gensler has shifted focus to firms offering trading platforms and clearing activity, and acting as broker-dealers.

Crypto companies deny that most tokens meet the definition of a security and say legislation is needed to regulate the industry.

Coinbase in August asked Judge Katherine Polk Failla to dismiss the SEC’s lawsuit, citing a ruling in a separate case in which a judge found Ripple Labs did not violate federal securities law by selling its XRP crypto token on public exchanges – a major victory for the crypto sector.

But the SEC argued that its case against Coinbase should proceed, citing a different court’s earlier ruling in the case of crypto developer Terraform Labs that vindicated the regulator’s position.

(Reporting by Hannah Lang in Washington and Chris Prentice and Jody Godoy in New York; Editing by Michelle Price and Christopher Cushing)