March 27 (Reuters) - A federal judge in Manhattan on

Wednesday said the U.S. Securities and Exchange Commission's

lawsuit against Coinbase can move forward, but

dismissed one claim the regulator made against the largest U.S.

cryptocurrency exchange.

U.S. District Judge Katherine Polk Failla partly granted

Coinbase's motion to dismiss the SEC's lawsuit which alleges the

company is flouting its rules.

While the decision is a partial win for Coinbase in what

could be a lengthy and expensive court battle, it largely

blesses the SEC's approach to cryptocurrency and agrees with

other judges who have sided with the regulator.

Shares in Coinbase were down about 1.5% in early afternoon

trading.

Coinbase Chief Legal Officer Paul Grewal said in a

social media post on X that the exchange was prepared for the

ruling and would continue to fight

the SEC's claims

.

"We remain confident in our legal arguments, we look

forward to proving we're right," he said.

A spokesperson for the SEC said the agency was "pleased

that yet another court has confirmed that, while the term

'crypto' may be relatively new, the framework that courts have

used to identify securities for nearly 80 years still applies."

"We will continue to protect investors against risks in

the crypto markets when, as here, the securities laws are

implicated," the spokesperson said.

HIGH-WATER MARK

The SEC sued Coinbase in June, saying the firm facilitated

trading of at least 13 crypto tokens that should have been

registered as securities and was operating illegally as a

national securities exchange, broker and clearing agency without

registering with the regulator.

Failla allowed most of the lawsuit to proceed, but dismissed

the SEC's claim that Coinbase acted as an unregistered broker

via its wallet application.

The case against the world's largest publicly-traded

cryptocurrency exchange is a high-water mark in the regulator's

campaign to apply U.S. securities law to the digital asset

companies.

To do so, the SEC has largely relied on a U.S. Supreme Court

ruling that set out a test for when an investment constitutes a

security. A key piece is whether returns "come solely from the

efforts of others."

Coinbase has argued that crypto assets, unlike stocks and

bonds, do not meet that definition, a position held by the vast

majority of the crypto industry.

Failla rejected that argument, saying the SEC has a

plausible claim that at least some of the digital assets listed

on the exchange are securities.

The SEC has pointed to statements by developers, including

Solana Labs, about efforts to build and improve their

technology.

"An objective investor in both the primary and secondary

markets would perceive these statements as promising the

possibility of profits solely derived from the efforts of

others," Failla wrote.

In the few cases that have gone to court, judges have mostly

agreed with the SEC that the crypto assets at issue were

securities.

Unlike assets such as commodities that are strictly

regulated, securities must be registered with the SEC by their

issuer. They also require detailed disclosures to inform

investors of potential risks.