Coinbase and SEC Dig in With U.S. Judge on Whether Securities Law Applies to Listings

The
U.S.
Securities
and
Exchange
Commission
(SEC)
case
against
Coinbase
delves
into
a
ton
of
complexity,
but
before
anything
else,
a
judge
has
to
decide
whether
transactions
in
about
a
dozen
tokens
traded
on
the
U.S.
exchange
were
securities.

Both
sides
–
the
SEC
and
Coinbase
–
agreed
in
a
Wednesday
court
hearing
that
the
tokens
themselves
aren’t
securities.
The
SEC
lawyers
argued
that
each
trade
amounted
to
an
investor
buying
into
a
token
ecosystem
in
which
the
purchaser
is
hoping
to
share
in
its
gains,
and
as
long
as
a
single
one
of
those
transactions
could
be
considered
an
investment
contract,
Coinbase
has
broken
securities
law.
But
the
company
said
these
are
secondary-market
trades
in
which
no
contract
is
in
place,
so
they
can’t
be
securities.

Coinbase
is
seeking
to
talk
Judge
Katherine
Polk
Failla
of
the
U.S.
District
Court
for
the
Southern
District
of
New
York
into
throwing
out
the
SEC’s
accusations
that
it’s
breaking
the
law.
Failla
decided
against
making
a
decision
from
the
bench
and
didn’t
explicitly
reveal
which
way
she’ll
rule
as
she
went
through
14
pages
of
questions
that
challenged
the
positions
of
both
the
regulator
and
the
business
over
more
than
four
hours.

Her
eventual
decision
–
expected
in
the
coming
weeks,
though
she
didn’t
hint
at
a
timeline
–
will
join
a
mixed
bag
of
other
recent
rulings
from
her
fellow
judges
in
the
same
court.
It’ll
either
reinforce
the
SEC’s
pursuit
of
crypto
platforms
as
unregistered
exchanges
dealing
in
unregistered
securities,
or
it’ll
add
to
the
agency’s
legal
losses
on
this
front
and
further
strengthen
the
industry’s
view
that
the
regulator
is
overreaching.
Either
way,
similar
SEC
cases
against
such
exchanges
as
Binance
and
Kraken
could
also
turn
on
Judge
Failla’s
view.

“It’s
the
same
computer
code
no
matter
which
one
of
us
has
it,”
said
Patrick
Costello,
a
lawyer
with
the
SEC
arguing
that
the
purchaser
is
getting
a
contract
however
they
obtain
the
digital
assets.
“The
token
is
the
key
that
gets
you
into
the
ecosystem.
The
token
is
worthless
without
the
ecosystem.”

William
Savitt,
an
attorney
with
Wachtell,
Lipton,
Rosen
&
Katz
representing
Coinbase,
contended
that
an
“investment
contract”
–
a
security
defined
by
the
so-called
Howey
test
–
actually
requires
a
contractual
obligation
to
be
in
place
between
the
token
issuer
and
the
buyer.

“There
has
to
be
a
statement
that
is
meant
to
convey
an
enforceable
promise,”
Savitt
said.
“If
you
don’t
have
that,
then
you
don’t
have
a
contract.”

He
called
this
“a
pure
question
of
law.”

The
judge
was
careful
not
to
signal
her
view,
just
acknowledging
at
one
point,
“This
is
a
hard
question.”

Costello
also
sought
to
counter
warnings
that
the
SEC’s
position
could
expand
the
definition
of
securities
to
collectibles
such
as
art
or
trading
cards,
saying
those
assets
are
missing
the
central
ecosystem.

“Collectibles
have
their
own
value,”
he
said.
“There’s
no
way
for
somebody
to
make
a
baseball
card
more
valuable.”

Judge
Failla
addressed
a
couple
key
rulings
on
SEC
crypto
cases,
including
the
agency’s
loss
against
Ripple
and
its
win
in
the
Terraform
Labs
action.

She
said
Judge
Jed
Rakoff’s
finding
in
Terraform
that
crypto
asset
transactions
were
securities
was
“not
a
shock
to
me.”
But
that
didn’t
involve
the
tokens
being
listed
on
a
secondary
exchange.
“Terraform
is
quite
different
from
the
facts
of
this
case.”

Failla
also
admitted
some
signifiant
hesitation
about
invoking
the
“nuclear
option”
of
the
so-called
Major
Questions
Doctrine
that
Coinbase
contends
should
head
off
the
SEC’s
actions
until
Congress
has
had
a
chance
to
establish
crypto
laws.

Crypto
insiders
embraced
the
judge’s
seeming
skepticism
of
some
of
the
agency’s
views
at
the
hearing.

“This
entire
hearing
has
been
very
skeptical
of
the
SEC’s
claims,”
Justin
Slaughter,
the
policy
director
at
Paradigm,
posted
on
X.

“This
is
a
fairly
extreme
case
of
a
regulator
wanting
to
have
its
cake
and
eat
it
too,”
Dave
Rodman,
founder
and
managing
partner
at
Rodman
Law
Group,
told
CoinDesk.
“After
all,
the
SEC
deemed
Coinbase
sound
enough
to
list
on
a
US
stock
exchange,
and
it
appears
that
it
is
backpedaling.”

Read
More:



Coinbase’s
SEC
Clash
Faces
First
Major
Test
as
Judge
Weighs
Longshot
Dismissal