On February 27, 2025, the Securities and Exchange Commission formally abandoned its enforcement action against Coinbase. Coinbase had previously announced the news.
In the press release announcing dismissal of the action, the Commission states:
On January 21, 2025, the Commission announced the formulation of the Crypto Task Force, which is dedicated to helping develop a comprehensive and clear regulatory framework for crypto assets. Given the pending work of the Crypto Task Force, the Commission is dismissing this matter….
The Commission’s decision to exercise its discretion and dismiss this pending enforcement action rests on its judgment that the dismissal will facilitate the Commission’s ongoing efforts to reform and renew its regulatory approach to the crypto industry, not on any assessment of the merits of the claims alleged in the action.
Similarly, the joint stipulation the Commission and Coinbase filed with the court in the action states, “in the exercise of its discretion and as a policy matter, the Commission believes the dismissal of this case is appropriate.” The stipulation requested the action be dismissed with prejudice, meaning it cannot be brought again.
Legal Tokens
The dismissal was not on the merits, which would have been awkward for the Commission given that the court had already concluded the case had merit, in a decision indicating the Commission would prevail and the case was all but over. This was in line with decisions of other federal courts that have held that tokens have been offered and sold as investment contracts under the Howey test, that is, as securities, including in the Commission’s Kik, Telegram, and Ripple actions.
While we are encouraged by the promise that the Crypto Task Force plans “to develop a clear and comprehensive regulatory framework for crypto assets,” it is hard to imagine they can develop a framework that disregards more than 80 years of precedent under Howey and its progeny. The Commission simply does not have that authority. For that, we would need an act of Congress. You can see this tension at play in the Commission’s recent guidance that meme coins are not securities except when, you know, they are securities under the Howey test.
There was an elegant off-ramp to be had. The Commission and Coinbase could have agreed to settle the alleged registration violations without specifying which tokens or transactions served as the basis for those findings, with no disgorgement because there are no victims here, and no penalty in light of regulatory uncertainty. There is also a sound argument to be made that many if not all secondary market transactions in tokens do not constitute securities transactions.
This option would have allowed the Commission to settle the action consistent with its evolving priorities, without undermining the credibility of the institution or its staff. Instead we have calls to shame and blacklist hardworking enforcement staffers for doing their jobs. Undoubtedly, under the Gensler Commission, there was a dearth of guidance outside of what could be gleaned from enforcement actions, the calls to “come in and register” appear to have been largely illusory, and there were cases that should not have been brought (looking at you Stoner Cats). However, it should not be necessary for Commissioner Crenshaw to remind us that the presidentially-appointed Commissioners themselves are responsible for all actions the Commission takes, not its career staff.
As Commissioner Peirce rightly points out, it has taken us a long time for us to get into this mess—the Commission’s first bitcoin related enforcement action was filed in 2013, the same year the Commission received its first bitcoin exchange-traded product application—and it’s going to take us a long time to get out of it. However, as Commissioner Crenshaw rightly points out, the Crypto Task Force has not yet done its work, the Commission has not yet enacted new regulations, and Congress has not yet changed the law.
Chair Uyeda’s mandate for the rebranded Cyber and Emerging Technologies Unit includes, among other things, investigating and prosecuting fraud cases involving blockchain technology and crypto assets. In this regard, it will be interesting to see how the Commission resolves its case against Binance, also on pause, as the fundamental difference between it and the Coinbase action is that—in additional to registration violations—the Commission alleges Biance engaged in fraud.
We look forward to further guidance from the Commission on the application of the federal securities laws to crypto assets. We look forward to a cessation of investigations and prosecutions (in lieu of regulatory guidance) where—as is the case with the securities law status of many tokens or token transactions—a fair, honest argument can be made for both sides of the brief. We have long felt that such cases do a disservice to investors, the markets, and entrepreneurs.
However, we caution our readers that the Commission’s as-yet undefined policy choice not to prosecute pure registration cases—or at least pure registration cases against financial intermediaries—will have little to no bearing on how federal courts decide matters brought by private plaintiffs. Or how state courts will decide matters brought by state attorneys general, who (assuming good intentions) feel the need to plug what they perceive to be a regulatory hole or (cynically) see an opportunity to elevate their profile by stepping into the breach.