Coinbase (NASDAQ: COIN) is celebrating some partial legal victories against America’s securities regulator while trying to dodge a new customer info request from Uncle Sam’s commodities regulator.
On January 8, an X user tweeted what he claimed was a message from the Coinbase digital asset exchange saying that it had been “served with a subpoena” by the Commodity Futures Trading Commission (CFTC) regarding customer accounts. The subpoena reportedly sought “general customer information” regarding Coinbase customers who may have had dealings with the Polymarket prediction betting site.
Following the reveal, Coinbase issued a terse statement saying it was still huddling with its attorneys to figure out how much of how many customers’ info it would have to hand over.
The CFTC imposed a $1.4 million penalty on Polymarket in 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 U.S. presidential elections.
As part of that settlement, Polymarket agreed to stop serving U.S.-based customers. But last November, the Federal Bureau of Investigation (FBI) raided the New York home of CEO Shayne Coplan and seized his phone, reportedly based on suspicions that U.S. bettors were still patronizing Polymarket.
Coplan framed the raid as President Joe Biden’s administration targeting “companies they deem to be associated with political opponents.” At the time, Polymarket’s presidential election betting market showed Donald Trump as the clear favorite over Biden, contradicting more narrow margins in mainstream polls. But Reuters reported that Polymarket had been under investigation months before those leading Trump signals.
If the Trump family felt it owed Polymarket anything due to its legal martyrdom, they aren’t showing it. On January 13, Donald Trump Jr. tweeted that he’d signed up as a ‘strategic advisor’ for Polymarket U.S.-licensed rival Kalshi. In proper 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 U.S. District Court of Appeals for the District of Columbia Circuit declined to stay a lower court’s ruling that Kalshi’s election betting markets weren’t gambling.
The U.S. ruling may not help Polymarket much, given the Trump family’s alignment with Kalshi, which doesn’t appear to be on super good terms with Polymarket. Shortly before that November raid on Coplan’s office, an unidentified X user tweeted what they claimed was evidence of a Kalshi exec tipping off a journalist regarding alleged wash trading and money laundering at Polymarket.
Polymarket bettors—and they are bettors, according to Singapore’s gambling regulator—wager using USDC, the stablecoin issued by Circle via a partnership with Coinbase. Following the raid on Coplan’s home, Coinbase CEO Brian Armstrong tweeted his outrage over the federal government’s alleged “political retribution,” but later deleted this tweet “until all the facts are in.”
CFTC chair sees new crypto crash coming
We’ll get back to Coinbase in a moment, but last week, CFTC chairman Rostin Behnam announced his plan to resign on January 20, the day Trump takes the oath of office. Shortly after that announcement, Behnam gave a speech in which he said digital assets had “dominated every season” of his seven-year CFTC tenure.
Behnam said digital assets continue to “integrate into traditional financial institutions without comprehensive regulatory guardrails.” Behnam said he’s seen this movie before “and we have seen time and time again that it ends badly.”
Behnam also gave an exit interview to Politico, saying that the “lack of clarity and certainty in the market certainly increases risk” and called on federal legislators to get off their butts and impose adequate guardrails. Behnam warned that a 2022-style crypto crash based on fraud and market manipulation may be less than two years away.
“If you do have a series of events from a macroeconomic perspective that might 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 to have to dump assets. And then that’s when you start to see it spiral.”
Trump has yet to announce Behnam’s replacement, making it likely that an acting chair will be appointed from the current crop of CFTC commissioners, including Republican appointees Summer Mersinger and Caroline Pham.
The CFTC’s fiscal 2024 produced a record $17 billion in monetary relief, primarily due to some major crypto enforcement actions. However, enforcement director Ian McGinley is stepping down 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 stewards in important CFTC roles.
Gensler still tossing rotten fruit at crypto
Gary Gensler, chair of the Securities and Exchange Commission (SEC), is also exiting on January 20 to avoid Trump fulfilling his campaign pledge 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 has the podium, he continues to lob verbal grenades at crypto bros.
Last week, an unrepentant Gensler told Bloomberg that the crypto sector lacked any purpose beyond ‘number go up.’ Traditional markets “trade on a mixture of fundamentals and sentiment,” while the “highly speculative, volatile” crypto sector was “so much wrapped around sentiment and not so much about fundamentals.”
Gensler called crypto “a field that built up around noncompliance” that remains “rife 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 belated SEC scalp came on January 11, when the Solana-based decentralized finance (DeFi) platform Mango Markets confirmed it was shutting down. Last September, the SEC reached a settlement with Mango Markets that required Mango-linked entities to destroy all their bespoke MNGO tokens and ask other platforms to remove MNGO tokens.
On January 3, Mango co-founder Maximilian Schneider said, “all active contributors … have expressed a desire to stop working on Mango in general.” Schneider called for a vote on a “graceful shutdown,” and Mango members agreed. Users were told to close their positions by January 13.
In January 2023, the SEC accused founder Avraham Eisenberg of stealing over $100 million worth of tokens from the platform’s users. While Eisenberg made partial restitution to Mango users, he was convicted of criminal fraud charges last April and will be sentenced to up to 20 years in prison this April 10.
Gensler can point to many similar victories over crypto crooks, but one of his biggest fights is definitely not going his way just as he’s going out the door.
Explain the appeal
In June 2023, the SEC charged Coinbase with operating as an unregistered securities exchange, broker, and clearing agency. Early on, the legal fight appeared to be heading the SEC’s way, particularly 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 tossed Coinbase a bone by granting Coinbase the right to appeal her ruling. Failla reasoned that an “immediate interlocutory appeal would materially advance the ultimate termination of the litigation because it could result in dismissal of the bulk of the SEC’s claims against Coinbase.”
In explaining her decision, Failla cited a pattern of conflicting rulings on whether the Howey Test—the gold standard for nearly 80 years for determining whether an asset is or isn’t a security—can be applied to digital assets.
In August 2023, one federal judge ruled that certain token sales didn’t violate Howey, a view that was rubbished by a different federal judge in January 2024. In last week’s ruling, Failla noted that “[c]onflicting authority exists regarding Howey’s application to crypto-assets.”
Failla also addressed the SEC’s view of the “significance of a crypto-asset’s digital ecosystem to the Howey analysis, particularly as a point of contrast with collectibles or other commodities.” Failla herself had used the ecosystem concept “to distinguish securities from commodities traded in an atmosphere of promotion.”
However, the ecosystem concept is “a difficult issue of first impression for the Second Circuit [court of appeals].” First impression refers to legal issues that have yet to be decided by a governing jurisdiction.
In a further blow to the SEC, Failla stayed the proceedings while Coinbase’s appeal was pending. Coinbase’s chief legal officer, Paul Grewal, tweeted his appreciation of Failla’s “careful consideration” of the legal question.
SEC told 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.”
The SEC rejected Coinbase’s demands for bespoke crypto regulations, calling it “unwarranted” and disagreeing with Coinbase’s claim that the application of traditional securities regulations to digital assets was “unworkable.” Coinbase vowed to appeal this rejection to the Third Circuit, and here we are.
The panel found the SEC’s rejection of Coinbase’s demands to be “conclusory and insufficiently reasoned, and thus arbitrary and capricious.” Gensler had pooh-poohed the need for bespoke crypto rules by noting its puny market cap compared to traditional markets, adding that the SEC had limited resources. But the panel said, “resource allocation is not a talisman that an agency may invoke to escape judicial review.”
The panel ordered the SEC to provide “a more complete explanation” of its reasoning, but said it was explicitly not ordering the SEC “to institute rule-making proceedings … Indeed, a rule may not prove necessary to solve the notice problems here; the agency could just state its position on 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 “should not give yet another poor explanation in an already-long line of them.”
Bibas added: “New inventions create new fraud risks, and the agency needs to guard against them. But sporadically enforcing ill-fitting rules against crypto companies that are trying to follow the law goes way beyond fighting fraud. It targets a whole industry and risks de facto banning it. 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 following the ruling. Meanwhile, CEO Armstrong claimed the ruling had given him “a greater level of respect” for the U.S. Constitution’s separation of powers and that the judicial branch has been “an effective deterrent against abuse.”
This victory is a bit Pyrrhic, given that Trump’s new regulatory chiefs will almost certainly give Coinbase the laissez-faire ‘rules’ the exchange and its ilk have long sought (and possibly dismiss all litigation in the process). Hopefully, Coinbase’s senior managers are still this giddy when they’re being sued by all the customers who got screwed over in crypto’s coming Wild West.
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