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Win or Lose on the SEC’s Cases Against Major Exchanges: We Should Not FUD

The partial denial of Coinbase’s motion for judgment on the pleadings and the default judgment issued in SEC v. Wahi have rightly captured crypto’s attention recently, as have the SEC’s cases against Kraken and Binance. The importance of a court judgment depends in part on the specific facts and circumstances around its issuance: what stage of the litigation it comes in, what type of motion it is responsive to, whether the case has been defended, etc. Below, we break down why the sky isn’t falling – it’s just another day in the rapidly shifting world of digital assets law. 


Each of the exchange cases is navigating similar stages of early, pre-discovery motion practice. We will focus on Coinbase’s development because Judge Katherine Failla of the Southern District of New York decided on its motion for judgment on the pleadings on March 27. That being said, despite certain procedural differences, the potential outcomes and next steps discussed below largely apply to all three cases. Although Coinbase’s motion was partially denied, ultimately, Judge Failla’s decision was not a decision on the merits of the SEC’s claims and Coinbase still has multiple avenues for future challenges.  


Why the Coinbase Decision Is Not The End of the World


On March 27, Judge Failla issued an order mostly denying Coinbase’s motion for judgment on the pleadings, which is a motion asking the court to determine whether the SEC’s allegations are sufficient on their face, based solely on the facts alleged in the parties’ pleadings (the SEC’s complaint and Coinbase’s answer). Because the motion was largely denied, the majority of the case proceeds to discovery. A key part of the order, however, was that Judge Failla dismissed the SEC’s claim that Coinbase acted as an unregistered broker through its wallet application, which is particularly good for DeFi. 


While it is possible for the SEC to appeal the dismissal of the Wallet claim because it is a “final order” getting rid of that claim, Coinbase cannot automatically appeal the denial of the rest of its motion because the remaining claims will remain in the case. While it is theoretically possible that Coinbase could move for permission to appeal, courts are reluctant to allow “interlocutory appeals” while the case is still pending1. Thus, the case likely moves forward with the remaining claims to moving to discovery, summary judgment, or a trial. 


Following discovery, either Coinbase or the SEC could bring a motion for summary judgment, which includes the judge considering the evidence that each party marshals from discovery. Even then, if the case is not resolved on summary judgment, the case proceeds to a trial, giving both sides another opportunity to advocate on the merits, based on more evidence and adversarial examinations. At any of these later points, Coinbase could—and we think will (#BULLISH) — still prevail. 


Similarly, in Kraken and Binance, where both defendants moved to dismiss the case, even if the motions are denied, losing their motion to dismiss does not mean an ultimate loss for the parties, not to mention the entire industry. 


Default Judgments Are Even Less of a Reason for FUD


A recent decision entered by Judge Tana Lin from the District Court for the Western District of Washington, and the SEC’s questionable choice to submit it as supplemental authority in these cases, has attracted the industry’s attention. Based solely on the allegations in the SEC’s complaint, Judge Lin granted the SEC a default judgment to the one defendant who never appeared in SEC v. Wahi, an ex-Coinbase employee’s insider trading case. In the order, Judge Lin stated that it was impossible to resolve the case on the merits, but still found that secondary market sales of tokens were securities transactions. Subsequently, the SEC filed notices of supplemental authority citing the default judgment in its cases against Coinbase and Binance. 


However, Coinbase and Binance quickly responded to the SEC’s submission, appropriately pointing out that Judge Lin’s order did not cite the recent opinion in SEC v. Ripple Labs, Inc., and the default judgment should be given no weight. As both Coinbase and Binance pointed out, a motion for default judgment is a purely procedural motion in which the SEC asks the court to rule against the absent party based solely on the facts alleged in the SEC’s complaint2. Because the defendant never appeared and was absent from the case, there was no adversarial discussion or examination of legal issues or facts. Instead, Judge Lin relied on a one-sided view of the allegations to enter the default judgment. Because of their nature, default judgments rarely set any precedent and are not binding on other courts. Additionally, the absence of any citation to the court’s opinion in SEC v. Ripple Labs, Inc., where Judge Analisa Torres from SDNY reached an opposite conclusion based on a well-developed record, undermines the default judgment order. 


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In the ongoing legal battles between industry participants like Coinbase, Binance, Kraken, and the SEC, keeping perspective is essential. Potential legal setbacks or daunting judgments should not cause panic. The legal process offers many layers and chances for outcomes to be challenged and overturned. Recognizing these developments is crucial to a broader and committed push for a more systematic and clarified legal framework in the digital assets industry. 



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