Coinbase Wallet Victory Over SEC Allegations Is ‘Huge Win’ For DeFi

Crypto advocates have praised a recent US judge's decision to dismiss allegations against Coinbase Wallet, a victory for self-sustaining wallets and decentralized finance (DeFi) applications.

U.S. District Judge Catherine Failla on March 27 dismissed the Securities and Exchange Commission's lawsuit against Coinbase's bid, saying the SEC “sufficiently pleaded” Coinbase's unlicensed and unregistered offering of crypto staking securities.

The judge also ruled that the SEC allowed Coinbase to arbitrage activity through Coinbase Wallet – a self-managed crypto wallet app that gives users full control over their assets.

“[This] It's a huge win for browser-based wallets, app front ends, and other similar applications,” Etena Labs general counsel Zach Rosenberg said in a March 27 X post.

“[It’s] Not only is Coinbase winning, it's the basis for it,” Rosenberg emphasized. Coinbase clarified that helping Wallet users find token values ​​does not mean it is acting as a broker, “by making referrals or recommendations.”

At this stage, it means that the court did not think that Coinbase would win this case, even if all the well-worded SEC allegations were accepted as categorically true, there was a convincing basis for the conclusion that Coinbase acted as a broker in providing Coinbase Wallet.

— Meat (@MeatEsq) March 27, 2024

The court order could be used by DeFi app developers facing similar charges to dispute allegations that they are acting as unregistered brokers.

Marisa Tashman Koppel, chief legal officer of the Blockchain Association, an industry advocacy group, said: “I'm very pleased to see the court limit the SEC's high-profile attack on Coinbase Wallet's allegations.”

Mike Selig of the law firm Willkie Farr & Gallagher told The Post that Coinbase Wallet's dismissal was a “huge setback” for the SEC.

“The SEC aims to discourage developers from developing peer-to-peer software. It doesn't work.”

According to Jake Chervinsky, Head of Legal at Crypto venture firm Variant, however, there are some positives in the judge's order – “Overall, the SEC wins.”

Related: US lawmakers ask SEC to clarify position on Prometheum's plans for Ether

“Wallet not being a broker is great for DeFi, and there's good language on other issues,” he said. But the court sided with the SEC (erroneously, [in my opinion]) on several key issues.”

Chervinsky, Judge Failla, explained that the Hawaii test – the legal framework for classifying securities – applies to “pure secondary market transactions” and ignores the ‘contract' in the ‘investment contract'.

The court accepted the SEC's theory that a project that uses sales profits to reinvest into the ecosystem is a “common enterprise” in which buyers can reasonably expect a profit – making it a security.

“It's a sad outcome,” Chervinsky said. But the SEC's case against Coinbase isn't the be-all and end-all.

The case will now proceed to discovery – where Coinbase and the SEC will gather evidence for their arguments.

The SEC first sued Coinbase in June of last year, alleging that the regulator listed 13 tokens that it considered securities and operated as an unlicensed exchange and broker-dealer.

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