51 W E S T 52 ND S T RE E T

NE W Y O RK , N. Y . 1 001 9- 61 5 0

Direct Dial: (212) 403-1329

June 28, 2023

The Honorable Katherine Polk Failla, U.S.D.J.

Re: Securities and Exchange Commission v. Coinbase, Inc.

Dear Judge Failla:

Pursuant to Rule 4(A) of the Court’s Individual Rules of Practice in Civil Cases, defendants
Coinbase, Inc. and Coinbase Global, Inc. (together, “Coinbase” or the “Company”) respectfully
write to notify the Court of Coinbase’s intent to file a motion for judgment on the pleadings
pursuant to Federal Rule of Civil Procedure 12(c) and to request a briefing schedule.

Coinbase, the largest U.S. digital asset exchange, has been publicly traded since April
2021, when plaintiff the Securities and Exchange Commission (“SEC” or “Commission”) declared
the Company’s registration statement effective after months of review. Compl. ¶¶ 16, 111; Answer
¶¶ 2, 63. Around that time, SEC Chair Gary Gensler testified before Congress that “there is not a
market regulator around these crypto exchanges” and “only Congress” could confer authority to
regulate crypto exchanges. Answer ¶¶ 7, 50. Two years on, with no intervening legislative act or
material change in Coinbase’s services, the SEC charges that the business exhaustively described
to the SEC and the public in connection with the Company’s direct public offering involves
unregistered securities-related activities under federal law. Compl. ¶¶ 3-4, 7-8.
Coinbase has answered the SEC’s Complaint with numerous defenses, including that this
action violates due process and constitutes an abuse of discretion. But there is a more fundamental
problem with the SEC’s case—one that the Chair recognized two years ago and that entitles
Coinbase to judgment on the pleadings now: The subject matter falls outside the SEC’s authority.
The SEC may pursue this enforcement action only if relevant transactions in the digital assets and
services identified in the Complaint are properly considered “investment contracts” and therefore
“securities” within the meaning of the Securities Act of 1933 (the “Securities Act”) and the
Securities Exchange Act of 1934 (the “Exchange Act”). Because as a matter of law none of them
are, the claims must be dismissed.
Background. The core of Coinbase’s business—and of the SEC’s charges—is the
provision of a spot exchange for secondary market trading of digital assets, sometimes called
“cryptocurrencies” or “tokens” or “crypto assets.” Answer ¶¶ 21, 31. And through a service called
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June 28, 2023
Page 2

Coinbase Prime, institutional customers can execute at scale trades over the Coinbase spot
exchange and other secondary spot exchanges of assets that have been approved for listing on
Coinbase. Id. ¶ 32. On both the spot exchange and Prime, one customer’s offer to buy or trade an
asset at a given price is matched with another’s offer to sell or trade—the exchange is (i) one digital
asset for (ii) another such asset or fiat currency. Id. ¶¶ 27, 31-32. Nothing else is exchanged or
promised. Id. ¶ 27.
Senior SEC officials have admitted that two tokens traded on Coinbase, Bitcoin and Ether,
are not securities. Id. ¶¶ 48, 73 & n.94. But the SEC now asserts that twelve of the more than 240
other tokens listed for trading are securities. Compl. ¶¶ 114, 119. And it claims that Coinbase acts
as a broker of a thirteenth “security,” NEXO, by making that token available for self-custody by
Coinbase customers in a free software application called Coinbase Wallet that allows users to store
and access their own digital assets on their own devices. Id. The SEC makes this allegation even
though Coinbase never takes custody of or even is able to access the assets stored using the Wallet
tool. Answer ¶ 33.
The final target of the SEC’s charges is Coinbase’s “staking” services, which allow
customers to earn rewards by contributing to the security of proof-of-stake blockchains. Compl.
¶ 7; Answer ¶ 34. The SEC calls this an unregistered “securities” offering, even though customers
who stake through Coinbase never surrender ownership of their tokens (or any other property) or
risk any loss by staking with Coinbase, and even though Coinbase’s fee for this service is not for
managerial but rather administrative IT services. Compl. ¶¶ 7-8; Answer ¶¶ 34, 62.
Congress has consistently recognized that regulatory authority over digital assets remains
unassigned. It has considered at least 15 legislative proposals concerning the regulation of digital
assets—including one as to which Coinbase’s Chief Legal Officer was scheduled to appear before
Congress and testify the morning this action was filed. None reflect the view that the SEC presently
has the authority it claims through this action. Answer ¶¶ 51-53.
Summary of Motion. The SEC can pursue its claims only if the tokens and staking services
it has identified are “securities.” They are not. The claims must therefore be dismissed.
The Exchange Act and the Securities Act both define “security” to include, among dozens
of other “instrument[s] commonly known as a ‘security,’” an “investment contract.” 15 U.S.C.
§ 78c(a)(10); 15 U.S.C. § 77b(a)(1). The Supreme Court, drawing from state Blue Sky law
jurisprudence, long ago defined this as a contract—or “transaction or scheme” of connected
contractual undertakings—in which an investor pays money for a promise to pay out profits or
income of a business at a future date. SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946).
The transactions over Coinbase’s platform and through Prime neither are nor involve
contracts of this kind. They are asset sales, with the obligations on both sides discharged at the
moment the digital token is delivered in exchange for payment. See Revak v. SEC Realty Corp.,
18 F.3d 81, 89 (2d Cir. 1994). No purchaser on Coinbase can claim any right beyond the right to
take possession of the token. See Rodriguez v. Banco Cent. Corp., 990 F.2d 7, 11 (1st Cir. 1993);
SEC v. Belmont Reid & Co., 794 F.2d 1388, 1391 (9th Cir. 1986). An “investment contract” is a
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June 28, 2023
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security because it has “the essential properties of a debt or equity security.” Wals v. Fox Hills
Dev. Corp., 24 F.3d 1016, 1018 (7th Cir. 1994) (Posner, C.J.). But unlike common stock and other
securities, no statutory, contractual, or common law rights travel with the tokens the SEC has
identified in its Complaint when they are traded on Coinbase. The absence of any such ongoing
contractual relationship is fatal to the SEC’s claims. As the Commission itself put it 77 years ago
in Howey, an “investment contract” is “any contractual arrangement for the investment of money
in an enterprise with the expectation of deriving profit through the efforts of the promoters.” Br.
for the SEC, SEC v. W.J. Howey & Co., No. 843 (U.S. Apr. 17, 1946), 1946 WL 50582, at *9. The
SEC’s position today—that “Howey says that an investment contract can cover schemes or
contracts,” SEC v. Binance Holdings Ltd., No. 1:23-cv-01599-ABJ, Tr. Hr’g TRO 16 (D.D.C. June
13, 2023)—is a distortion of the decades-old precedent it invokes.
What is more, whatever extra-contractual expectation a Coinbase purchaser may have in
the increase of her token’s market value is not an “interest[] in an enterprise”—a claim to the
profits, assets, or management of the business. Rodriguez, 990 F.2d at 10 (citing Howey, 328 U.S.
at 298-99). Reflecting the varieties of corporate finance, a classic security can be a simple share of
stock, constituting a claim on dividends and the residual value of an enterprise; a preferred share
of stock, with a coupon and a liquidation preference; a bond, note, or other debt contract that yields
a fixed return for the investor, see SEC v. Edwards, 540 U.S. 389, 394 (2004); and an investment
contract, where the investor pays money in exchange for a contractual claim on the proceeds of
the business. But there must be a legal interest in an enterprise. Because the transactions over
Coinbase involve no such interest, they are not securities.
Even if the SEC presented a colorable claim that the transactions at issue here are
“investment contracts,” the “major questions” doctrine would require dismissal of the Complaint.
Having expressly recognized that it has not yet delegated regulatory authority over cryptocurrency,
Congress is actively considering regulatory structures. The SEC thus lacks the “clear congressional
authorization” required to exercise “[e]xtraordinary” wholesale power over an emergent $1 trillion
industry. Answer ¶¶ 16-17, 82; see West Virginia v. EPA, 142 S. Ct. 2587, 2608-09 (2022).
The SEC’s attacks on Wallet and Coinbase’s staking services likewise founder. The SEC
fails to allege that the tokens it identifies as available in Wallet bear critical features of an
investment contract, and pleads nothing to suggest that Wallet functions as a broker under the
securities laws in any event. As for staking, because the facts pleaded establish that staking service
customers neither invest money for a share in an enterprise nor expose themselves to a risk of loss
of their staked tokens by staking through Coinbase’s software nor receive managerial as opposed
to administrative services, there is no investment contract as a matter of law.
Coinbase looks forward to briefing more fully these case-dispositive arguments. To
achieve prompt presentation and resolution of its anticipated motion, Coinbase respectfully asks
the Court to order the following briefing schedule: (a) Coinbase’s motion due within 7 days of the
Court’s order; (b) opposition due within 28 days of Coinbase’s motion; (c) reply due within 14
days of opposition. Counsel for the SEC has indicated the Commission will oppose the motion.
Counsel are available for a pre-motion conference at the Court’s convenience.
Hon. Katherine Polk Failla
June 28, 2023
Page 4

Respectfully,

/s/ William Savitt .

William Savitt

cc: Steven R. Peikin, Esq.,

Peter Mancuso, Esq.