The U.S. Securities and Exchange Commission (SEC) has brought a case against Coinbase that involves a complex set of issues. However, before any definitive decision can be made, the judge must first determine whether the transactions involving about a dozen tokens traded on the U.S. exchange should be classified as securities.
In a court hearing on Wednesday, both the SEC and Coinbase agreed that the tokens themselves are not securities. The SEC argued that each trade represents an investment in a token ecosystem, with the purchaser hoping to share in its profits. According to the regulator, even if just one of these transactions can be considered an investment contract, Coinbase would be in violation of securities laws. On the other hand, Coinbase argued that these are secondary-market trades where no contract is in place, and therefore cannot be considered securities.
Coinbase is seeking to persuade Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York to dismiss the SEC’s allegations of illegal activity. However, Failla did not make a decision during the hearing and did not reveal her stance as she questioned both sides over the course of four hours.
Her eventual ruling, expected in the coming weeks, will join a series of recent decisions made by other judges in the same court. It will either strengthen the SEC’s pursuit of crypto platforms as unregistered exchanges dealing in unregistered securities, or add to the agency’s legal setbacks and affirm the industry’s belief that the regulator is overreaching. Similarly, the outcome could impact similar SEC cases against exchanges such as Binance and Kraken, depending on Judge Failla’s ruling.
During the hearing, SEC lawyer Patrick Costello argued that the digital assets obtained by the purchaser through any means are essentially the same computer code, and the token is the key to accessing the ecosystem. He stated that without the ecosystem, the token would be worthless.
In contrast, William Savitt, representing Coinbase, argued that for a security to be classified as an “investment contract” under the Howey test, there must be a contractual obligation between the token issuer and the buyer. He emphasized that a statement that conveys an enforceable promise must be present for a contract to exist.
Judge Failla remained impartial and acknowledged the complexity of the case. She also addressed previous rulings made by other judges in SEC crypto cases, including the agency’s loss against Ripple and its win in the Terraform Labs action. Failla noted that Judge Jed Rakoff’s decision in the Terraform case was not surprising, but it did not involve the tokens being listed on a secondary exchange, making it different from the current case.
Failla also expressed hesitation about invoking the “nuclear option” of the Major Questions Doctrine, which Coinbase contends should prevent the SEC’s actions until Congress has established clear crypto laws.
Crypto industry insiders welcomed the judge’s apparent skepticism towards the SEC’s arguments during the hearing. Justin Slaughter, the policy director at Paradigm, commented on the hearing, stating that it seemed “very skeptical of the SEC’s claims.”
According to Dave Rodman, founder and managing partner at Rodman Law Group, the SEC’s actions in this case could be seen as “wanting to have its cake and eat it too.” He pointed out that the SEC had previously deemed Coinbase fit enough to list on a U.S. stock exchange, yet now appears to be backtracking.