U.S. Judge Dismisses Allegations Against Coinbase Wallet: A Major Step for DeFi
Summary:
A U.S. judge dismissed allegations against Coinbase Wallet, marking a key victory for self-custody wallets and DeFi apps. Despite claims that Coinbase was operating without a license, the judge ruled that the SEC failed to prove that Coinbase managed brokerage activities through their Coinbase Wallet. The decision is viewed favorably by various industry professionals, who believe it could aid DeFi app developers facing similar legal issues. However, other experts warn that overall the ruling still favors the SEC. The lawsuit will now move into the discovery phase.
In a recent verdict lauded by cryptocurrency attorneys, a U.S. judge disregarded claims against Coinbase Wallet, signaling a notable victory for self-custody wallets and decentralized finance (DeFi) applications. Despite U.S. District Judge Katherine Failla rejecting Coinbase's plea to discard a lawsuit from the Securities and Exchange Commission (SEC) on March 27, asserting that the SEC had "adequately pleaded" Coinbase's unlicensed status and its crypto staking service was unregistered securities, she ruled the SEC couldn't prove Coinbase conducted brokerage activities via Coinbase Wallet - a self-custody app allowing users complete ownership of their digital assets. General counsel at Ethena Labs, Zach Rosenberg, regards this as a valuable triumph for browser-based wallet extensions and app front ends.
In a post dated March 27, he highlighted not just the victory of Coinbase, but also the argumentative basis behind it. He clarified that simply assisting users in locating token prices doesn't denote brokerage activities by recommending or routing. Even if it was assumed that all allegations made by the SEC were valid, the court did not find substantial grounds to claim that Coinbase was acting as a broker through its wallet service.
This ruling could potentially benefit DeFi application creators facing similar lawsuits by helping them challenge claims of operating as unauthorized brokers. Marisa Tashman Coppel, legal head at infrastructure support organization, Blockchain Association, expressed her satisfaction with the court's decision to limit the SEC's overextension on matters concerning Coinbase Wallet. Meanwhile, in a separate post, Mike Selig, a partner at law firm Willkie Farr & Gallagher, termed the dismissal of allegations against Coinbase Wallet as a "major blow" to the SEC, stating the agency's failed attempt to dissuade peer-to-peer software development.
However, Jake Chervinsky, the chief legal officer at crypto venture firm Variant, voiced his thoughts on the matter differently, indicating that despite a few positives from the judge's order, the overall ruling favored the SEC. Clarifying Failla's application of the Howey Test – a legal gauge to identify securities – Chervinsky said the test applied to "purely secondary market transactions" and overlooked "'contract' in 'investment contract.'" He also proclaimed the court accepted SEC's argument claiming that tokens using sales profit for reinvestment in their ecosystem is a "common enterprise," thus making it a security as buyers would expect profits. Deeming this result as discouraging, Chervinsky still suggests this isn't the end for the SEC's lawsuit against Coinbase. The litigation will now proceed into the discovery phase where Coinbase and SEC must substantiate their claims with evidence.
The SEC first lodged a lawsuit against Coinbase in June of last year, alleging the exchange listed 13 tokens perceived as securities and conducted functions as an unlicensed exchange and broker-dealer, a claim vehemently denied by Coinbase.
Published At
3/28/2024 5:34:44 AM
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