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Crypto Community Rallies: DeFi Education Fund Files Amicus Brief in Coinbase vs. SEC Case What Happened?
Last week, we filed an amicus brief in the U.S. District Court for the Southern District of New York in support of Coinbase’s motion for judgment on the pleadings against the Securities and Exchange Commission (SEC). The SEC sued Coinbase in June 2023, accusing the company of operating as an unregistered securities exchange, broker, and clearing agency. The purpose of an amicus brief is to educate the court and supplement the party’s arguments, so we chose to focus on two issues that are key to DeFi and software developers more generally: the SEC’s allegations concerning Coinbase’s wallet application (“Wallet”) and its staking service.
First, we address the SEC's allegation that Coinbase is operating as an unregistered broker through Wallet. We explain the technical details of how wallets work and argue that developing and providing wallet application software is not broker activity. In order to be a broker, a person or entity must “effect” transactions in securities on behalf of others—i.e., they must act as an intermediary. Coinbase’s development and provision of Wallet does not satisfy this definition because a wallet application is merely passive software. Coinbase does not control users’ assets, handle customer funds, or commingle assets through Wallet as private keys are stored directly on users’ devices and not with Coinbase (or any third party).
Furthermore, Coinbase does not “open” customer “accounts” through Wallet as the SEC alleges, because there is no such thing as “opening” an “account” on a blockchain. Wallet applications simply assist the user in randomly selecting a private key then mathematically generating a public key from there. It cannot be the case that software that helps users select a random number and apply publicly available cryptography to derive another number constitutes “opening an “account.”
Finally, the SEC does not allege facts from which the court could hold that Coinbase “routes” orders—a wallet application is simply software that facilitates communication to a blockchain network. Coinbase does not have control over a user’s assets or transactions because the user has control over their own private key, and therefore, their assets—i.e., the user has complete authority to communicate their desired transaction to the blockchain and Coinbase does not.
Our second argument addresses the SEC’s allegation that Coinbase is selling unregistered securities through its Staking Program. We assert that Coinbase is not selling unregistered securities because its role in this program is purely ministerial and akin to an IT service provider. For a transaction or scheme to be an “investment contract,” and thus a security, it must meet the four prongs of the Howey test: (1) an investment of money (2) in a common enterprise (3) with a reasonable expectation of profits (4) from the efforts of others. With its Staking Program, Coinbase is not the “primary determiner” of stakers’ rewards, the consensus protocol—which is software run on the blockchain and controlled by no one—determines what rewards are given to users. Therefore, we conclude that stakers’ rewards are not based on the “efforts of others” and there is “common enterprise” among stakers and Coinbase. We also point out that stakers do not transfer crypto or private keys to another party or give up control over their crypto when staking; therefore, there is no “investment of money” under Howey.
What Does it Mean?
The case has significant implications for the cryptocurrency industry and the future of crypto exchanges in the United States. We appreciate that Coinbase has decided to vigorously litigate this important case and think it is important for the industry to stand together in moments such as this one. It has been encouraging to see a number of amicus briefs filed in support of Coinbase, including briefs from Senator Cynthia Lummis, the Blockchain Association, Crypto Council for Innovation, Chamber of Digital Commerce, and academics.
Senator Lummis’s Amicus Brief in Support of Coinbase’s Dismissal
What Happened?
Senator Cynthia Lummis (R-WY) also filed an amicus brief in support of Coinbase's motion, emphasizing that “the SEC can’t legislate by enforcement” in an area that has “profound economic and political significance.” She argues that the SEC is acting beyond its authority because Congress has not endowed the SEC with the authority to regulate crypto assets or markets and that it is Congress’s choice to do so (or not) through the legislative process.
Additionally, Senator Lummis argues that the SEC's claim that virtually all crypto assets are securities goes beyond the agency's scope of authority. She argues that this assertion encroaches on Congress's legislative authority and breaches the crucial principle of the separation of powers.
What does this mean?
Senator Lummis's amicus brief highlights the industry's concerns about regulatory overreach from an agency that has not been granted authority to pursue its current course of action: proactively attempting to seize control over the industry through enforcement actions. Senator Lummis’s perspective also serves as a reminder that crypto’s fight against SEC overreach is happening in the context of a broader debate about the compatibility of the administrative state—as it is structured and operates today—and our constitutional framework.