The Securities and Exchange Commission (SEC) revealed an enforcement action against Coinbase (NASDAQ:COIN) back in June. Among other allegations, the SEC claims that Coinbase is operating as an unregistered securities exchange. The SEC targeted Coinbase even though it had clearly approved the firm to become a publicly traded company.
The case is ongoing as Coinbase counters the accusations by the SEC. This past week, the Crypto Council for Innovation (CCI) filed an Amicus Brief in support of Coinbase.
CCI was joined by the Blockchain Association, Chamber of Progress, and the Consumer Technology Association in support of Coinbase’s motion for judgment on the pleadings in response to the action initiated by the SEC.
This effort represents a significant step in challenging the SEC’s flawed interpretation that nearly all digital assets sold on the secondary markets are “investment contracts” under federal securities laws, even though those transactions involve no ongoing contractual obligations. This stance threatens responsible innovation by the digital assets industry, while creating unprecedented expansion of the SEC’s regulatory authority.
According to Ji Kim, General Counsel & Head of Global Policy for the Crypto Council for Innovation, the SEC is exceeding its authority in rewriting the longstanding interpretation of “investment contract” in an attempt to “front-run Congress’ efforts to establish a proper legislative framework for digital assets.” It is well known that the House is pushing through comprehensive legislation addressing digital assets. Several members of the Senate are attempting to do the same.
The CCI believed that the SEC’s assertion that nearly all digital assets sold on secondary markets are “investment contracts” fails as a matter of law as those transactions involve no contractual obligations or rights. CCI believes this is a flawed interpretation. At the same time, CCI says Congress never authorized the SEC to regulate certain digital assets.
CCI states:
“…the SEC is challenging statutory text, historical precedent, congressional intent, and legal frameworks according to a joint amicus brief. This flawed interpretation forms the basis of the SEC’s enforcement action against Coinbase. This attempt must be rejected as the SEC’s actions do not posit clear congressional authorization.”
Kim said:
“Let’s apply that flawed logic to real-life. When I buy a basketball card of my favorite player, Kobe Bryant and hope to turn a profit based on Upper Deck’s efforts, that would turn my purchase into a securities transaction regulated by the SEC. Accepting that sweeping view would be an unprecedented expansion of the SEC’s authority and extend its reach into every corner of the American economy, including over a broad range of assets and collectibles.
The SEC’s position fails as a matter of text, history, precedent, and common sense. Unfortunately, this is the argument the SEC uses to bring its enforcement actions against Coinbase and other secondary market platforms.”
While it is not clear if comprehensive digital asset legislation can make it through Congress there is clearly a need for better defined rules. Meanwhile, several other large jurisdictions have crafted bespoke regulations for digital assets to operate in a compliant manner that is designed to allow for innovation.
The CCI Amicus Brief is available here.