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Coinbase Wallet’s Victory Over SEC Claims: A Major Leap for DeFi

Coinbase

In a recent landmark decision, crypto lawyers are celebrating a U.S. judge’s dismissal of allegations against Coinbase Wallet. This ruling is seen as a significant victory for self-custody wallets and decentralized finance (DeFi) apps.

On March 27, U.S. District Judge Katherine Failla rejected Coinbase’s attempt to dismiss a lawsuit from the Securities and Exchange Commission (SEC). The judge found that the SEC had “sufficiently pleaded” that Coinbase operated without a license and that its crypto staking offering constituted unregistered securities.

However, the judge also ruled that the SEC failed to prove that Coinbase conducted brokerage activities via its Coinbase Wallet. This self-custody crypto wallet app allows users to maintain full control over their assets.

Zach Rosenberg, General Counsel at Ethena Labs, hailed this as a “giant win” for browser-based wallet extensions, application front ends, and other similar applications. He emphasized that Coinbase’s assistance to Wallet users in finding token prices does not equate to acting as a broker by “routing or making recommendations.”

This court order could potentially be used by DeFi app developers facing similar lawsuits to argue against allegations of acting as an unregistered broker.

Marisa Tashman Coppel, Legal Head of the Blockchain Association, expressed her satisfaction with the court’s decision to curb the SEC’s overreach concerning the Coinbase Wallet allegations.

However, Mike Selig, a partner at law firm Willkie Farr & Gallagher, stated that the dismissal of the Coinbase Wallet was a “significant setback” for the SEC.

Jake Chervinsky, Legal Chief at crypto venture firm Variant, acknowledged some positives in the judge’s order but overall declared it a win for the SEC. He explained that Judge Failla applied the Howey test, a legal framework for classifying securities, to “purely secondary market transactions,” ignoring the “‘contract’ in ‘investment contract.’”

Chervinsky also noted that the court adopted the SEC’s theory that a token project using sale profits to reinvest in its ecosystem constitutes a “common enterprise” where buyers would reasonably expect profits, thus making it a security.

While Chervinsky expressed disappointment with the outcome, he stressed that this is just the beginning of the SEC’s case against Coinbase. The case will now proceed into the discovery phase, where Coinbase and the SEC will gather evidence for their arguments.

The SEC initially sued Coinbase in June of the previous year, alleging that it listed 13 tokens deemed securities by the regulator and operated as an unlicensed exchange and broker-dealer, a claim which Coinbase denies.

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