By Hannah Lang and Jody Godoy
(Reuters) -A federal judge in Manhattan on Wednesday said the U.S. securities regulator’s lawsuit against Coinbase (NASDAQ:) can move forward, but dismissed one claim the agency made against the largest U.S. cryptocurrency exchange. The decision partly granted Coinbase’s motion to dismiss the Securities and Exchange Commission’s lawsuit alleging the company is flouting its rules.
The SEC and Coinbase did not immediately respond to a request for comment.
While the decision is a partial win for Coinbase in what could be a lengthy and expensive court battle, it largely blesses the SEC’s approach to cryptocurrency and agrees with other judges who have sided with the regulator.
Shares in Coinbase were down 2.4% in morning trading following the ruling.
The SEC sued Coinbase in June, saying the firm facilitated trading of at least 13 crypto tokens that should have been registered as securities and was operating illegally as a national securities exchange, broker and clearing agency without registering with the regulator.
Judge Katherine Polk Failla allowed most of the lawsuit to proceed, but dismissed the SEC’s claim that Coinbase acted as an unregistered broker via its wallet application.
The case against the world’s largest publicly-traded cryptocurrency exchange is a high-water mark in the regulator’s campaign to apply U.S. securities law to the digital asset companies.
To do so, the SEC has largely relied on a U.S. Supreme Court ruling setting out a test for when an investment constitutes a security. A key piece is whether returns “come solely from the efforts of others.”
Coinbase has argued that crypto assets, unlike stocks and bonds, do not meet that definition, a position held by the vast majority of the crypto industry.
Failla rejected that argument, saying the SEC has a plausible claim that at least some of the digital assets listed on the exchange are securities.
The SEC has pointed to statements by developers, including Labs and Polygon Technology, about efforts to build and improve their technology.
“An objective investor in both the primary and secondary markets would perceive these statements as promising the possibility of profits solely derived from the efforts of others,” Failla wrote.
In the few cases that have gone to court, judges have mostly agreed with the SEC that the crypto assets at issue were securities, which unlike assets such as commodities are strictly regulated, must be registered with the SEC by their issuer and require detailed disclosures to inform investors of potential risks.
