Coinbase and SEC Reach Agreement: Lawsuit Dismissal Imminent

Coinbase, a leading cryptocurrency exchange, has announced that the U.S. Securities and Exchange Commission (SEC) has agreed to dismiss its lawsuit against the company. In a blog post and regulatory filing, Coinbase stated that it has reached an agreement in principle with SEC staff to dismiss the lawsuit with prejudice, meaning the complaint cannot be refiled. The agreement is subject to SEC commissioner approval.

The SEC currently has only two sitting commissioners: Republicans Mark Uyeda, who is acting chair, and Hester Peirce. Uyeda and Peirce have previously expressed their disapproval of the agency's enforcement action track record under Chair Genser. Given their well-documented stance, it is expected that the two commissioners will sign off on the agreement reached between SEC staff and Coinbase.

As of this afternoon, the SEC had not filed a motion to dismiss the lawsuit in either the Southern District of New York (SDNY) or the Second Circuit, which has been tasked with ruling on Coinbase's interlocutory appeal. Earlier this week, the SEC filed for an extension in the Second Circuit, mentioning its new "crypto task force" that may help facilitate the potential resolution of the litigation.

The lawsuit, originally filed in 2023, alleged that Coinbase violated securities laws by selling unregistered securities. Thirteen unregistered securities, including solana and filecoin, were named in the suit. Last year, Coinbase attempted to get the lawsuit tossed but largely failed. However, the judge did agree to dismiss allegations around Coinbase's wallet service, which the SEC had claimed acted as an unregistered broker.

Coinbase then filed a motion for an interlocutory appeal, asking the judge to allow a higher court to weigh in on one crucial question in the case. The judge agreed, and the question now posed to the Second Circuit is whether intermediated crypto transactions involve investment contracts. If the answer is yes, then crypto exchanges are facilitating securities transactions, which would be a problem.

Coinbase elevating part of this case to the Second Circuit was seen as a major win, as appellate level decisions hold more weight and could set a precedent for future cases. However, with the impending dismissal of the lawsuit, an appellate ruling may no longer be necessary. The industry's need for clarity on crypto regulations may decrease if the "new" SEC does not pursue similar enforcement actions against other crypto exchanges in the future.