Judge Schools SEC, Says Agency Could've Given Exchange Heads Up Prior To IPO Approval

District Judge Katherine Polk Failla, the federal judge in charge of the case between the U.S. Security and Exchange Commission (SEC) and Coinbase, has seemingly aligned with Coinbase's argument on why the agency did not warn the cryptocurrency exchange of any gray areas in the past, noting that the financial regulator could have given the firm a heads up prior to approving its public listing.

This comes after the SEC argued that its approval of Coinbase's S1-form prior to it going public is not a blanket "blessing" and does not prove that the crypto exchange business complies with regulations.

"Simply because the SEC allows a company to go public does not mean that the SEC is blessing the underlying business or the underlying business structure or saying that the underlying business structure is not in violation of the law," SEC counsel Peter Mancuso said, according to a July 13 court document from last week's pre-motion hearing.

"There is no evidence being put forth that the SEC looked at specific assets and made specific determinations and then gave Coinbase comfort that this would not later be found to be a security," he added.

The SEC counsel's statement underlined that the agency's approval of the S-1 application (SEC's registration required for U.S. companies that want to be listed on a national exchange) of Coinbase to conduct an initial public offering (IPO) does not reflect the commission's blanket approval to the exchange's whole business.

Judge Failla responded to this by saying, "Let's just pause so I can just sort of get rid of the skepticism I currently have as I hear that answer."

"I am not saying that the commission should be omniscient at the time it's evaluating a registration statement and that it should know all things. But I would have thought the commission was doing diligence into what Coinbase was doing, and somehow I thought that it would say, you know, you really shouldn't do this," the judge said, according to the court document.

"This is violative of the securities laws, or we are kind of in some interesting unchartered territory here with respect to whether the assets on your platform are securities, so be forewarned that maybe someday there could be a problem," she continued.

"You never could have said to them, 'Hey, you guys need to register as a securities exchange.' That was within the power of the SEC to do, was it not, " Judge Failla then explained, highlighting that it made sense for Coinbase to assume that it was in the clear since it received no warning from the SEC before its IPO.

"It's not crazy in the Failla parlance for Coinbase to think that what they were doing was OK because it was exactly what you let them do when they issued the S-1," she said further.

The SEC filed a case against Coinbase in June over securities law violations.

Coinbase is now the surveillance partner of all the traditional financial institutions applying for spot Bitcoin ETF with the SEC.