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Coinbase Challenges SEC’s Classification of Crypto as Securities in Ongoing Legal Battle

Coinbase, a leading cryptocurrency exchange, is embroiled in a legal dispute with the U.S. Securities and Exchange Commission (SEC) over the classification of crypto assets as securities. In a recent development, Coinbase’s legal team has petitioned U.S. District Judge Katherine Failla to reconsider a prior judgment that categorized secondary sales of crypto assets as securities transactions.

The request, outlined in a letter dated March 5, argues against the SEC’s classification of crypto sales in the secondary market as securities contracts, citing the lack of substantial legal scrutiny. Coinbase’s attorney, Michael Savitt, contends that the SEC’s classification, particularly evident in the SEC vs Wahi case, was never thoroughly examined in court.

The legal tussle stems from a lawsuit filed by the SEC in July 2022 against Ishan Wahi, a former Coinbase product manager, and others, alleging insider trading involving nine cryptocurrencies. While the defendants sought dismissal, citing the tokens’ exclusion as “investment contracts,” a settlement was reached with the Wahi brothers in June 2023. Subsequently, a default judgment was secured against Sameer Ramani, who did not defend himself, reinforcing the SEC’s stance on the tokens’ classification.

Coinbase’s legal maneuver challenges the validity of the default judgment, arguing that it lacks substantive legal debate and should not serve as precedent. This move follows the SEC’s attempt on March 4 to leverage the Wahi case outcome against Coinbase’s position, emphasizing the tokens’ classification as securities.

The ongoing legal discourse revolves around the application of the Howey test, a criteria used to determine if crypto assets listed on Coinbase’s platform qualify as securities. The SEC’s lawsuit against Coinbase, initiated in June 2023, accuses the exchange of violating federal securities laws by listing 13 tokens deemed securities.

The regulatory landscape surrounding cryptocurrencies remains uncertain, with companies such as Coinbase facing heightened scrutiny from regulatory bodies like the SEC, led by Jay Clayton and Gary Gensler. Amidst sluggish legislative progress on cryptocurrency regulation, the debate over the regulatory oversight of crypto exchanges intensifies, underscoring the challenges posed by the ambiguous regulatory status of cryptocurrencies beyond Bitcoin.

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