Assessing the Landscape: One Year into the SEC’s Litigation Against Major U.S.

[co-author: Majer Ma]

The SEC’s litigation against the largest digital asset exchanges in America has been unfolding for over a year, beginning with the agency suing various Binance entities¹ in June 2023, followed by actions against Coinbase Inc./Coinbase Global Inc. (collectively “Coinbase”), and Payward, Inc./ Payward Ventures, Inc. (collectively “Kraken”) shortly thereafter.

The cases have all advanced through the Motion to Dismiss briefing stage (for Binance and Kraken) and Motion for Judgment on the Pleadings stage (for Coinbase) with rulings in Coinbase and Binance completed on those issues and expected soon in Kraken.

With these cases having been previously discussed in the Polsinelli Bi-Weekly updates, the various lawsuits have reached a point in litigation where it is now the opportune moment to assess where those cases stand, anticipate what to expect in the upcoming year, and explore their implications for the digital asset industry through 2024 and into 2025.

BACKGROUND

In June 2023, the SEC brought a lawsuit against the various Binance entities and their founder, Changpeng Zhao (together “Binance”). The Binance lawsuit alleges that sales of Binance’s own digital assets on its platform (BNB and stablecoin BUSD) along with facilitating the sales of various other cryptocurrencies on the Binance platform, constituted violations of securities laws.² Shortly thereafter, the SEC brought a similar lawsuit against Coinbase, alleging sales of various cryptocurrencies³ on its platform were unregistered securities transactions, alleging the Coinbase wallet functioned as an unregistered broker/dealer, and that Coinbase’s staking services were also unregistered securities offerings. Finally, the SEC brought a lawsuit against Kraken, which had already settled allegations related to the Kraken staking services, alleging sales of various cryptocurrencies⁴ on its platform were unregistered securities transactions. Other than the Binance case related to BNB and BUS, none of the lawsuits named the issuers of the cryptocurrencies as defendants.

At the time of filing of these cases, there was also additional litigation between Binance, Coinbase, and various regulatory bodies. Binance was facing separate lawsuits from the DOJ and CFTC which have since settled. Concurrently, Coinbase was involved in a lawsuit against the SEC concerning its request for rulemaking. This issue was rendered moot when the SEC declined to issue digital asset-specific rules, leading Coinbase to initiate a new and still ongoing appeal of that SEC decision.

COINBASE MOTION FOR JUDGMENT ON THE PLEADINGS RULING

Coinbase was the first of the exchanges to move to dismiss the SEC’s lawsuit, taking the unusual procedural posture of answering the SEC’s Complaint and then immediately moving for judgment on the pleadings. This is in contrast to a more standard litigation procedure involving the filing of a motion to dismiss, as both Binance and Kaken did. This strategy allowed Coinbase to supplement the factual record for the court’s consideration with the information provided in Coinbase’s answer. Coinbase argued that the digital assets sold on its exchange should not be classified as “investment contracts” under the Howey test and thus are not securities.⁵ Coinbase argued that purchasing the digital assets at issue on a secondary exchange did not give the buyers of those digital assets any contractual rights to the issuer’s income, profits, assets of a business, or otherwise impose any obligations for anybody to further develop the applicable digital asset’s network. This line of argument has been referred to as the “Investment Contracts Require Contracts” argument.

Coinbase also argued that the “major questions doctrine” justified rejecting the SEC’s classification of the digital asset transaction at issue as investment contract transactions. The major questions doctrine holds that significant regulatory decisions should be made by Congress, rather than regulatory agencies, on “major questions” that would significantly affect a substantially sized industry. Coinbase contended that accepting the SEC’s legal stance would potentially have a crippling effect on the $3 trillion digital asset industry. Finally, as to the SEC’s allegations surrounding Coinbase’s digital wallet software and staking functionalities, Coinbase asserted that it did not function as a broker merely by making what it referred to as “passive software” available to customers. Coinbase further argued that the staking-as-a-service functionalities made Coinbase a service provider and not a securities issuer; a point which was emphasized by various amicus filed in support of Coinbase’s argument. Coinbase also argued that…