Coinbase Says the SEC Intends to Drop Lawsuit Against Crypto Exchange — WSJ

By Dave Michaels and Vicky Ge HuangRegulators have agreed to drop a lawsuit against Coinbase that sought to regulate the company as a stock exchange, marking the end of years of hard-line enforcement against the crypto market.Coinbase said Friday that enforcers at the Securities and Exchange Commission would recommend dismissal of the two-year-old lawsuit, a crucial plank of the agency's strategy to bring crypto under investor-protection rules. Coinbase had fought the suit, which was filed during the Biden administration, arguing the law didn't support equating crypto assets with securities."It's a great day for Coinbase and for crypto," said Paul Grewal, Coinbase's chief legal officer. "We were committed to defending it [the lawsuit] to the gates of hell, for as long as it took and for as much money as it took."Dismissing the Coinbase lawsuit still requires a commission vote. The company expects the vote to happen next week, Grewal said.The SEC's retreat was expected after the election of President Trump, who embraced crypto and promised to end the industry's friction with the commission. Still, it represents a rare instance of regulators reversing their position on a significant issue for investors.Coinbase in January had appealed a federal district court's ruling that declined to throw out the SEC's case. That appeal will now be moot. An SEC spokesman declined to comment.The SEC is making peace with crypto firms after Coinbase and others poured millions into helping elect lawmakers friendlier to the industry. Trump is a major backer of crypto and last month sold his own digital token that has a market value of about $3.4 billion.Some regulation advocates say it is a mistake for the SEC to surrender to an unregulated industry that has been vulnerable to fraud and contagion. The crypto market in 2022 was rocked by a series of bankruptcies, the implosion of a major stablecoin, criminal-fraud charges against the founder of a major crypto exchange, and falling prices.The agency is also backing away from positions it took during the first Trump administration, when its chairman, Jay Clayton, launched an enforcement campaign against dozens of crypto assets that he said were illegally marketed to investors without the SEC's oversight."It's going to embolden law breakers everywhere," said Dennis Kelleher, the president of Better Markets, a pro-regulation group that backed a tough approach to crypto. "The SEC is supposed to be the cop on the beat and here it's unilaterally disarming."The crypto market has been on a tear since Trump won the presidential election. Bitcoin soared past $100,000 in December after Trump nominated crypto ally Paul Atkins to lead the SEC. Other smaller and riskier tokens also surged, while "memecoins", a type of cryptocurrency created based on internet memes, proliferated. Coinbase has been quick to list those tokens, which typically serve no economic purpose other than speculation .Coinbase CEO Brian Armstrong himself has warned that some meme coins have "clearly gone too far." "In every crypto cycle, there is a 'get rich quick' crowd that comes and goes, and learns this lesson the hard way," he said Wednesday in a post on the social media platform X. "Don't break the law! And don't try to get rich quick."The SEC has already moved to break up the special enforcement unit that was devoted to investigating crypto companies. Former SEC Chair Gary Gensler, who stepped down in January, nearly doubled the unit's size as he pursued legal action against exchanges such as Coinbase, Binance and Kraken to force them to adopt similar investor protections to those imposed on Wall Street.Acting SEC Chairman Mark Uyeda said Thursday that the unit would have a broader remit and "deploy enforcement resources judiciously," including investigating fraud involving crypto assets. The Coinbase lawsuit didn't involve any fraud claims.Uyeda said last month that a new SEC task force is considering how to move away from Gensler's approach toward the crypto market.The SEC appears poised for a much smaller role policing the industry. House and Senate lawmakers are working on legislation that would likely lead to most cryptocurrencies being treated as commodities. That would probably give oversight of more crypto assets to the Commodity Futures Trading Commission, a much smaller agency than the SEC.The securities agency is still litigating with Binance and Kraken. This month regulators asked a federal court hearing the Binance case in Washington, D.C., to put it on hold, citing the opportunity to resolve the case through the work of the agency's task force.Dismissal of the SEC's case would create a more favorable environment for Coinbase's growth, allowing the company to list more tokens and offer more products, analysts say. The company delivered a blowout fourth-quarter earnings report as major cryptocurrencies rallied after the U.S. election.Coinbase is also diversifying into areas beyond trading and earning more revenue from products such as staking, which allows investors to earn interest on their tokens. The SEC lawsuit had alleged that Coinbase's staking program was an illegal sale of securities, which the company has denied.Write to Dave Michaels at [email protected] and Vicky Ge Huang at [email protected]