Months before cryptocurrency exchange Coinbase (COIN.O) became the biggest target of the U.S. crackdown on digital assets, the company launched an unusual legal offensive, recruiting top lawyers to try to shape court rulings in other cases.
Before the U.S. Securities and Exchange Commission sued Coinbase on June 6, the company had weighed in on two other crypto-related lawsuits brought by the regulator and urged judges to adopt views on open legal questions that are now at the heart of its own case.
Amicus Briefs: Unconventional Strategy to Influence Court Rulings
In each case, Coinbase filed briefs as an “amicus,” or friend of the court.
While common at the U.S. Supreme Court, amicus briefs are filed in just 0.1% of cases in federal trial courts, according to law firm Gibson Dunn & Crutcher, although crypto industry groups have been filing an increasing number in SEC cases in support of defendants.
Potential Impact and Arguments Made in Amicus Briefs
A ruling favoring another crypto defendant at the trial court level would not be binding on Coinbase’s own case, but the company could potentially point to it in its defense, legal experts said. The few judges who have previously ruled in similar cases have endorsed the SEC’s approach.
Filing amicus briefs in the trial court is about starting “the ball rolling in the right direction” on legal issues that the amicus cares about, said Akiva Shapiro, one of the authors of the Gibson Dunn study.
Gibson Dunn represents Coinbase as an amicus in one of the cases. Spokespeople for the SEC and Coinbase both declined to comment.
Shift in SEC’s Focus: From Developers to Exchanges
For years, the regulator had pursued developers for selling digital tokens without registering them. But it has recently shifted focus to the bigger players like exchanges as it tries to corral what SEC Chairman Gary Gensler called “the Wild West.”
The SEC’s biggest U.S. target is now Coinbase, which it sued in Manhattan federal court. It accused the company of operating an unregistered exchange, broker, and clearinghouse, saying at least 13 of the crypto assets it made available to U.S. investors, including Solana, Cardano, and Polygon, were securities.
Paul Grewal, Coinbase’s general counsel, said the day the case was filed, that the company is “absolutely committed to defending itself in court.”
Coinbase Challenging the SEC’s Authority
Coinbase began its broader legal push last year, after the SEC started investigating it. It tapped major corporate defense law firms Gibson Dunn and Cahill Gordon & Reindel to file papers in the two cases.
In one instance, the company urged U.S. District Judge Tana Lin in Seattle to dismiss an insider trading case brought by the SEC against former Coinbase product manager Ishan Wahi. Coinbase itself was not a defendant in the case.
The exchange’s main argument in its amicus brief, which could preview its defense in its own case, is that the SEC lacks authority to police the space because many digital assets are not securities.
Further, Coinbase contended that the SEC misapplied a legal test, which defines “an investment of money in a common enterprise with profits to come solely from the efforts of others” as a type of security known as an investment contract.
Coinbase contended that the digital assets on its platform do not pass that test, partly because they lack contractual agreements. However, the SEC has argued that the test, which has been applied to investments in various assets, depends on the economic realities of transactions rather than the labels applied to them.
Moreover, the regulator has urged judges to focus on the way digital assets are marketed, pointing to promises by crypto developers that investors will profit if their projects succeed.
Challenging Lack of Clear Guidelines
Coinbase also argued in its brief that the SEC has not set clear guidelines that would give cryptocurrency industry participants “fair notice” that a particular digital asset is a security before suing. It violated their right to due process under the U.S. Constitution.
However, SEC Chairman Gary Gensler has been dismissive of this argument. He stated that many companies in the space had made a “calculated economic decision” to flout the rules.
In its other amicus brief, Coinbase urged U.S. District Judge Analisa Torres in Manhattan to allow the fair notice defense in the SEC case against Ripple Labs. It was the industry’s highest-profile battle with the regulator prior to the Coinbase case.
The regulator sued Ripple Labs in 2020, accusing the San Francisco-based blockchain company, and its current and former chief executives of conducting a $1.3 billion unregistered securities offering. It was through selling the crypto XRP, created by Ripple’s founders in 2012.
Coinbase argued that denying the Ripple defendants the fair notice defense “would jeopardize the validity of the defense in future cases.”