Judge rejects Coinbase’s ‘major questions doctrine’ argument in landmark SEC case

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Leo Schwartz
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The Securities and Exchange Commission notched a victory on Wednesday in its ongoing campaign to rein in the crypto industry, as Judge Katherine Failla ruled largely against a motion by Coinbase to dismiss a lawsuit brought by the agency.

In her 84-page decision, Failla argued that the SEC had adequately alleged that Coinbase, the leading crypto exchange in the U.S., had operated outside of securities laws by offering products involving cryptocurrencies to users without first registering with the agency.

The SEC brought the lawsuit against Coinbase in June, with enforcement director Gurbir Grewal arguing that the crypto firm couldn't simply "ignore the rules because you don't like them." After filing a motion to dismiss the lawsuit, both sides pleaded their cases in front of Failla at a Southern District of New York courthouse in January.

Central to Coinbase's argument is its longstanding claim that the SEC is engaged in a campaign of "regulation by enforcement" against the crypto industry, meaning it's creating new guardrails to supervise the sector through lawsuits rather than establishing set rules. Key among those concerns is the question of which cryptocurrencies constitute securities, and therefore fall under the remit of the SEC. While Chair Gary Gensler has said that the vast majority of cryptocurrencies are securities, the agency—and Congress—have yet to create formal rules.

Coinbase tried to make that case before Failla and she largely rejected it, finding that the SEC's allegations were strong enough to warrant a full trial. Although her ruling isn't the final decision, Failla did seem to side with the SEC's definitions of crypto asset securities, applying past case law, including a consequential Supreme Court precedent called the Howey Test. Coinbase tried to argue that securities should include a formal investment contract, a view Failla rejected.

Major questions

Outside of the nitty-gritty of securities law, Coinbase tried to make two larger arguments in its motion to dismiss. Failla disagreed with one—that the SEC violated Coinbase's right to due process by not providing the industry with fair notice that crypto assets traded on digital platforms could be considered securities. She argued that the SEC had provided proper notice through written guidance, litigation, and other actions.

But Coinbase also attempted a more consequential plea by invoking the major questions doctrine, a guiding principle established by the Supreme Court that says Congress should not delegate to agencies like the SEC on matters of major political or economic significance. As the U.S. judicial system shifts to the right, with justices more amenable to restricting the administrative powers of governmental agencies, Coinbase sought to argue that the SEC was overstepping its authority by hampering the growth of a new industry.

Once again, Failla rejected Coinbase's position, throwing cold water on the theory that the major questions doctrine could apply to crypto. Citing case law, she wrote that the sector "falls short of being a 'portion of the American economy' bearing 'vast economic and political significance,'" and that the crypto industry "cannot compare with other industries the Supreme Court has found to trigger the major questions doctrine," such as energy markets.

She further argued that the SEC already has authority over the securities industry, which is "even broader than the markets for cryptocurrencies," and that the agency is not overstepping its Congressionally granted powers.

While the theory was unlikely to hold water with federal judges, Coinbase's loss still represents a setback for the firm, and the crypto industry more broadly, as similar lawsuits involving Binance and Kraken are ongoing.

Despite the overall ruling, Coinbase still scored a win as Failla agreed to dismiss a specific portion of the lawsuit that alleged its Wallet product operated as an unregistered broker.

"We’re pleased that yet another court has confirmed that, while the term ‘crypto’ may be relatively new, the framework that courts have used to identify securities for nearly 80 years still applies," an SEC spokesperson said in a statement shared with Fortune. "We will continue to protect investors against risks in the crypto markets when, as here, the securities laws are implicated."

When reached for comment, a Coinbase spokesperson pointed to an X post from the firm's chief legal officer, Paul Grewal, who wrote, in part: "We remain confident in our legal arguments, we look forward to proving we’re right."

Failla ordered both sides to submit a case management plan by April 19.

This story was originally featured on Fortune.com

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