Coin base (NASDAQ: COIN) is celebrating some partial legal victories against the US Securities and Exchange Commission while trying to avoid a new request for customer information from Uncle Sam’s commodities regulator.
On January 8, an X user tweeted what he claimed was a notice from digital asset exchange Coinbase that said it had been “served with a subpoena” by the Commodity Futures Trading Commission (CFTC) regarding customer accounts. The lawsuit reportedly sought “general customer information” regarding Coinbase customers who may have had dealings with Polymarket prediction game site.
After the disclosure, Coinbase issued a terse statement saying it was still consulting with its lawyers to figure out how much of how many customers’ information it would have to hand over.
CFTC imposed a penalty of $1.4 million at Polymarket 2022 for what the regulator claimed were violations of the Commodity Exchange Act (CEA). Specifically, Polymarket failed to obtain CFTC approval to offer event-based binary options trading contracts, including prop bets on everything from celebrity divorces to US presidential elections.
As part of that settlement, Polymarket agreed to stop serving US-based customers. But last November, the Federal Bureau of Investigation (FBI) raided CEO Shayne Coplan’s home in New York and seized his phone, reportedly based on suspicions that American players still patronize Polymarket.
Coplan framed the raid as President Joe Biden’s administration is targeting “companies they believe are associated with political opponents.” At that time, Polymarkets presidential election betting market showed Donald Trump as the clear favorite over Biden, belies narrower margins in mainstream polls. But Reuters reported that Polymarket had been under investigation months before the leading Trump signals.
If the Trump family felt they owed Polymarket anything because of its legal martyrdom, they’re not showing it. On January 13, Donald Trump Jr. tweeted that he had signed up as a “strategic advisor” to Polymarket US-licensed rival Kalshi. In true logrolling fashion, Kalshi tweeted a celebration of “Don Jr.’s bold vision and deep expertise.”
Kalshi won a legal skirmish with the CFTC last October when the US District Court of Appeals for the District of Columbia Circuit declined to stay a lower court’s ruling that Kalshi’s betting markets did not play.
The US ruling may not help Polymarket much, given the Trump family’s alignment with Kalshi, who doesn’t seem to be on super good terms with Polymarket. Just before that November raid on Coplan’s office, an unidentified X-user tweeted what they claimed was evidence that a Kalshi executive tipped off a journalist regarding alleged laundry and money laundering at Polymarket.
Players in the poly market – and they are the players, according to Singapore’s gambling regulator— bet with USDC, the stablecoin issued by Circle via a partnership with Coinbase. After the raid on Coplan’s home, Coinbase CEO Brian Armstrong tweeted his outrage at the federal government’s alleged “political retaliation,” but later deleted this tweet “until all the facts are in.”
CFTC chair sees another crypto crash coming
We’ll come back to Coinbase in a moment, but last week CFTC Chairman Rostin Behnam announced his plans to resign on January 20the day Trump is sworn in. Shortly after that announcement, Behnam gave a speech where he said digital assets had “dominated every season” during his seven-year CFTC tenure.
Behnam said digital assets continue to be “integrated into traditional financial institutions without extensive regulatory safeguards.” Behnam said he’s seen this movie before “and we’ve seen time and time again that it ends badly.”
Behnam also gave an exit interview to Politico, saying “the lack of clarity and certainty in the marketplace certainly increases the risk” and urged federal lawmakers to get off their asses and put in place appropriate safeguards. Behnam warned that a 2022-style crypto crash based on fraud and market manipulation could be less than two years away.
“If you have a series of events from a macroeconomic perspective that can push asset prices down — and you start to see that correlation with crypto and (BTC) — then maybe that’s when you have people who are (leveraged) start having to dump assets. And that’s when you start to see it spiral.”
Trump has yet to announce Behnam’s replacement, making it likely that an acting chairman will be chosen from among the current crop of CFTC commissioners, including Republican appointees Summer Mersinger and Caroline Pham.
The CFTC’s fiscal year 2024 produced a record $17 billion in monetary easingmainly due to some major crypto enforcement actions. It is, however, Chief Inspector Ian McGinley departs on January 17 after less than two years on the job. Slowly but surely, the slate is being cleared so that the Trump administration can appoint more crypto-friendly trustees to key CFTC roles.
Gensler is still throwing rotten fruit at crypto
Gary Genslerchairman of the Securities and Exchange Commission (SEC), is also ends on January 20 to avoid Trump fulfilling his campaign promise to fire Gensler on Day 1 of his second term. Trump has nominated Paul Atkins as Gensler’s crypto-friendly replacement, but while Gensler still holds the podium, he continues to lob verbal grenades at the crypto bros.
Last week, an incurable Gensler told me Bloomberg that the crypto sector lacked any purpose beyond “numbers go up.” Traditional markets “trade on a mix of fundamentals and sentiment,” while the “highly speculative, volatile” crypto sector was “so much surrounded by sentiment and not so much about fundamentals.”
Gensler called crypto “a field that was built around non-compliance” that remains “rich with bad actors.” Gensler defended his enforcement record, saying the roughly 100 crypto actions brought by the SEC during his tenure were “consistent” with the 80 or so actions brought by his predecessor, Jay Clayton.
A delayed SEC scalp came on January 11, when Solana-based decentralized finance (DeFi) platform Mango markets confirmed that it was is turned off. Last September, the SEC reached a settlement with Mango Markets requiring Mango-linked entities to destroy all their custom MNGO tokens and asking other platforms to remove MNGO tokens.
On January 3, Mango founder Maximilian Schneider said, “all active contributors … have expressed a desire to stop working with Mango in general.” Schneider called for a vote on a “graceful suspension”, and the Mango members agreed. Users were advised to close their positions by January 13.
In January 2023, the SEC charged founder Avraham Eisenberg with steal over $100 million worth of tokens from the platform’s users. While Eisenberg made partial compensation to Mango users, he did convicted of criminal fraud April last year and will be sentenced to up to 20 years in prison on April 10.
Gensler can point to many similar victories over crypto villains, but one of his biggest fights definitely doesn’t go his way right when he walks out the door.
Explain the appeal
In June 2023, SEC charged Coinbase operating as an unregistered securities exchange, brokerage and clearinghouse. Early on, the legal battle appeared to be going against the SEC, especially after U.S. District Judge Katherine Polk Failla for the Southern District of New York denied Coinbase’s motion to dismiss in March 2024.
But fast forward to January 7, 2025, and Failla threw Coinbase a leg up gives Coinbase the right to appeal her decision. Failla reasoned that an “immediate interlocutory appeal would materially advance the final dismissal of the litigation because it could result in the bulk of the SEC’s claims against Coinbase being dismissed.”
In explaining his decision, Failla cited a pattern of conflicting rulings on whether Howey test— the gold standard for nearly 80 years for determining whether or not an asset is a security — can be applied to digital assets.
In August 2023, a federal judge ruled that some token sales did not violate Howey, a view tainted by another federal judge in January 2024. In last week’s ruling, Failla noted that “(c)ontravailing authority exists regarding Howey’s application to cryptoassets.”
Failla also addressed the SEC’s view of “the importance of a cryptoasset’s digital ecosystem to the Howey analysis, particularly as a contrast to collector’s item or other commodities.” Failla himself had used the ecosystem concept “to distinguish securities from commodities traded in an atmosphere of marketing.”
However, the ecosystem concept is “a difficult question of first impression for the Second Circuit (Supreme Court).” First impression refers to legal issues that have not yet been decided by a governing jurisdiction.
In a further blow to the SEC, Failla stayed the proceedings while Coinbase’s appeal was pending. Coinbase’s general counsel, Paul Grewal, tweeted his appreciation of Failla’s “careful consideration” of the legal question.
The SEC is invited to show its work
On January 13, a three-judge panel of the Third Circuit Court of Appeals handed Coinbase another partial victory by ordering the SEC to explain why it rejected Coinbase’s July 2022 request/demand for “rules clarifying how and when the federal securities laws apply to digital assets.” “
SEC rejected Coinbase’s demands for tailored crypto regulations, calling it “unwarranted” and disagreeing with Coinbase’s claim that the application of traditional securities rules to digital assets was “dysfunctional.” Coinbase promised to appeal this rejection to the Third Circuit, and here we are.
The panel found The SEC’s denial of Coinbase’s claims was “conclusory and insufficiently motivated, and thus arbitrary and capricious.” Gensler had pooh-poohed the need for tailored crypto regulations, noting its small market capitalization compared to traditional markets, adding that the SEC had limited resources. But the panel said, “resource allocation is not a talisman that an agency can invoke to escape judicial review.”
The panel ordered the SEC to provide “a more complete explanation” of its reasoning, but said it did not specifically order the SEC to “initiate rulemaking proceedings … A rule may not prove necessary to resolve the notice problems here; the agency could only state its position about crypto-assets unequivocally.”
In a separate filing by panel member Judge (and presumably a future member of Coinbase’s advisory board), Stephanos Bibas warned that the regulator “shouldn’t give another bad explanation in an already long line of them.”
Bibas added: “New inventions create new fraud risks, and the agency must guard against them. But sporadically enforcing inappropriate rules against crypto companies trying to comply with the law goes far beyond fighting fraud. It targets an entire industry and risks de facto banning on remand, the SEC must grapple with that problem.”
The SEC said it was reviewing the decision before announcing its next move, but Coinbase’s Grewal was downright giddy after the verdict. At the same time CEO Armstrong claimed the ruling had given him “a greater level of respect” for the U.S. Constitution’s separation of powers and that judicial authority has been “an effective deterrent to abuse.”
This victory is a bit pyrrhic, given that Trump’s new regulatory chiefs will almost certainly give Coinbase let it happen “rules” the exchange and its ilk have long sought (and possibly reject any litigation in the process). Hopefully, Coinbase’s higher-ups are still so squeamish about being sued by all the customers who got screwed in crypto’s upcoming Wild West.
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