Why the SEC’s dismissal of Coinbase lawsuit is a resounding victory for cryptocurrencies

If there was any doubt before that the Trump White House would break with President Biden’s hostile stance toward the cryptocurrency industry, it has certainly disappeared today.

This morning, Coinbase announced that it had reached an agreement with the U.S. Securities and Exchange Commission (SEC), which sued the company in June 2023 for (among many other charges) operating as an unlicensed national securities exchange, to completely dismiss the lawsuit. Coinbase will not have to pay any fines or change any aspects of its business. The case will be "dismissed with prejudice," meaning it cannot be re-filed in the future.

“We’re not looking to pay any fines,” said Paul Grewal, Coinbase’s chief legal officer. “But if they [the SEC] want to correct the mistake, admit that this was a huge mistake, and drop the case, we’re not going to stand in their way. And that’s what ultimately happened today.”

The actual revocation can’t happen until next Thursday, when the three current commissioners, Mark Uyeda, Hester Peirce and Carolyn Crenshaw, are scheduled to vote on the proposal. Grewal said Coinbase decided to go public today because it will file a Form 8-K with the SEC, so the information would have entered the public domain anyway. These forms are filed by companies registered with the SEC to announce material events that shareholders should know about. When asked about the possible revocation, the SEC declined to comment.

The fact that the case was “dismissed with prejudice” rather than settled for even a nominal penalty is a huge win for the industry and vindicates its view that the SEC’s position was unfair.

“They’re suing us without any legal basis. They’re suing us without telling us what the rules are,” Grewal said. “They’re imposing what is effectively a tax on American innovation on Coinbase and other industries, costing hundreds of millions, if not billions, of dollars.”

Impact on Binance, Kraken, and Uniswap

The next question is what happens with similar lawsuits the SEC has filed against Coinbase competitors like Binance and Kraken, as well as leading decentralized exchange Uniswap. Grewal hopes those companies will see similar resolutions in the short term. “It’s going to be up to the SEC and other parties to figure this out at the end of the day,” he said. “But we think we’ve provided a template or a model for others to follow, and I believe we’ll see peace across the industry soon.”

A former SEC official familiar with the cases, speaking to Unchained on condition of anonymity, agreed that similar reversals are possible. “I think if they dismiss this case, we’ll see all the other cases dismissed in the coming days. I don’t understand how they can continue with these cases.”

The former official noted that Binance’s case may be an exception because the lawsuit (also filed in June 2023) contains allegations of fraud and manipulative trading, which are absent from other complaints. The former official noted that the SEC may be reluctant to drop these charges because they could lead to actual customer harm. On February 13, a federal judge granted a joint request from Binance and the SEC to stay the case for 60 days, citing the development of a framework that could provide greater regulatory clarity for the industry.

Cryptocurrency still needs fair competition

While the case was widely celebrated within the crypto community, there are still many important issues that need to be resolved to make the industry more trustworthy and transparent. The revocation does little other than clarify that the SEC will allow secondary sales of tokens on exchanges like Coinbase and creates breathing room for regulators and lawmakers in Congress to draft rules to regulate the industry. Congress is working on legislation to establish rules for the $200 billion stablecoin industry and a market infrastructure bill to regulate spot cryptocurrency trading and draw the lines of authority between the SEC and its sister agency, the Commodity Futures Trading Commission (CFTC).

Commissioner Hester Peirce is leading a newly formed agency-wide cryptocurrency task force “dedicated to developing a comprehensive and clear regulatory framework for crypto assets.” In a Feb. 4 blog post, Peirce made it clear that a top priority is eliminating information asymmetries between project insiders and the broader investing public, as the recent LIBRA memecoin fiasco demonstrated.

“The Working Group is also considering the possibility of recommending that the Commission take action to provide interim prospective and retroactive relief for tokens or token offerings for issuing entities or other entities willing to assume liability by providing certain specified information, keeping that information current, and agreeing not to challenge the Commission’s jurisdiction in cases alleging fraud related to asset purchases and sales,” Pierce wrote.

Christopher Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC), believes now may be the right time to completely disrupt the way industries disclose information. He is an advisor to Bluprynt, a company that is using blockchain technology to instantly distribute on-chain market data and disclosures on everything from tokenized shares of Coinbase stock to oil production.

“Depending on whether the asset is a security or a commodity, you’ll have a sliding spectrum of information centralization or information decentralization,” Giancarlo said. “We’re going to have to take a more holistic view, but technology will give us the tools necessary to balance information across the entire scale from a fully decentralized commodity to a highly centralized ICO.”

For crypto to truly turn over a new leaf, this revocation should be seen as a catalyst to accelerate all of these conversations. But for now, Grewal hopes the SEC will continue to hunt for the true bad actors in the space. “The SEC and other agencies should be focused on fraud. Fraud has no place in any market, and crypto is no exception. It’s unfortunate that Gary Gensler decided to spend millions of dollars of taxpayer funds on a variety of other odysseys, romps, and detours that have nothing to do with fraud.”