A recent decision by a judge in the United States to dismiss allegations against Coinbase Wallet has been celebrated by crypto lawyers as a victory for self-custody wallets and decentralized finance (DeFi) apps.
On March 27, U.S. District Judge Katherine Failla denied Coinbase’s request to dismiss a lawsuit from the Securities and Exchange Commission (SEC), ruling that the SEC had provided enough evidence to support its claim that Coinbase was operating without a license and offering unregistered securities through its crypto staking service.
However, the judge also stated that the SEC had failed to prove that Coinbase was conducting brokerage activity through its self-custody crypto wallet app, Coinbase Wallet, which allows users to have full control over their assets.
“This is a significant win for browser-based wallet extensions, application front ends, and similar applications,” said Zach Rosenberg, the general counsel of Ethena Labs. He emphasized that Coinbase’s assistance to Wallet users in finding token prices does not make it a broker that provides recommendations or routes transactions.
The court’s decision could be used by developers of DeFi apps facing similar lawsuits to argue against the allegation that they acted as unregistered brokers.
Marisa Tashman Coppel, the legal head of the industry advocacy group, the Blockchain Association, expressed her satisfaction with the court’s ruling, stating that she was “very pleased to see the court limit the SEC’s excessive authority regarding the Coinbase Wallet allegations.”
Mike Selig, a partner at the law firm Willkie Farr & Gallagher, described the dismissal of the Coinbase Wallet case as a “significant setback” for the SEC.
However, Jake Chervinsky, the legal chief of crypto venture firm Variant, pointed out that while there are some positive aspects in the judge’s order, the overall outcome favors the SEC. Chervinsky argued that the court incorrectly applied the Howey test, a legal framework used to determine whether something is a security, and adopted the SEC’s theory that a token project reinvesting sale profits into its ecosystem qualifies as a “common enterprise” and therefore a security.
Chervinsky noted that this outcome is disappointing but emphasized that it is only the beginning of the SEC’s case against Coinbase.
The case will now enter the discovery phase, where both Coinbase and the SEC will gather evidence to support their arguments.
The SEC initially filed a lawsuit against Coinbase in June of last year, accusing the company of listing 13 tokens that the regulator considered securities and operating as an unlicensed exchange and broker-dealer. Coinbase has denied these allegations.
In conclusion, the article highlights the significance of the judge’s decision to dismiss the allegations against Coinbase Wallet, as it sets a precedent for self-custody wallets and DeFi apps. However, there are differing opinions on the overall outcome of the case, with some viewing it as a win for Coinbase and others believing it is a setback for the SEC. The legal battle between Coinbase and the SEC is far from over, and the case will continue into the discovery phase.