Five
hours
in
court,
and
the
fate
of
Coinbase
as
a
going
concern
hangs
in
the
balance.
On
Wednesday,
Coinbase
and
the
U.S.
Securities
and
Exchange
Commission
(SEC)
sounded
off
in
the
Southern
District
of
New
York,
arguing
over
whether
the
top
securities
watchdog’s
lawsuit
against
the
largest
U.S.
crypto
exchange
is
valid.
This
is
an
excerpt
from
The
Node
newsletter,
a
daily
roundup
of
the
most
pivotal
crypto
news
on
CoinDesk
and
beyond.
You
can
subscribe
to
get
the
full
newsletter
here.
To
the
surprise
of
many,
U.S.
District
Judge
Katherine
Polk
Failla
came
prepared
and
seemed
unusually
open
to
hearing
Coinbase
out.
It’s
just
one
more
data
point
showing
that,
even
if
Congress
is
unable
to
pass
meaningful
legislation,
and
executive
agencies
continue
to
“regulate
by
enforcement,”
crypto
can
at
least
get
a
fair
trial.
Coinbase
is
pushing
to
dismiss
the
case
—
and
while
no
formal
decision
has
been
made,
Failla
did
reportedly
express
concern
that
the
SEC
is
misinterpreting
U.S.
securities
laws
and
overstepping
its
bounds.
The
SEC’s
case
calls
Coinbase’s
business
model
into
question.
If
the
agency
wins,
it
could
force
Coinbase
to
delist
tokens
it
deems
to
be
securities
(13
tokens
were
named
in
the
complaint,
but
SEC
Chair
Gary
Gensler
said
most
cryptocurrencies
resemble
securities)
and/or
shut
down
certain
corporate
operations.
Investment
bank
Mizuho
described
this
as
turning
altcoins
into
“haltcoins.”
But
just
as
the
SEC
is
calling
out
a
core
aspect
of
Coinbase’s
business,
Judge
Failla
poked
holes
in
one
of
the
SEC’s
central
claims.
Namely,
Failla
questioned
the
idea
that
when
someone
buys
a
token,
they
are
buying
into
a
“common
enterprise”
and
“expect
profits”
based
on
the
work
of
developers,
which
is
the
definition
of
security
under
the
prevailing
“Howey
Test.”
See
also:
Gary
Gensler’s
Bitcoin
ETF
Clown
Show
If
that
were
the
case,
it’d
open
up
the
possibility
of
treating
collectables
like
Beanie
Babies
as
securities,
Coinbase
lawyer
William
Savitt
noted,
in
an
echo
of
Judge
Failla’s
broader
concerns
about
over-regulating
commodities.
Savitt
added
that,
unlike
stocks
or
bonds,
crypto
tokens
don’t
necessarily
grant
holders
rights
over
a
network.
“Investment
contracts
have
to
have
contracts,”
he
said,
describing
the
types
of
legal
“enforcement
mechanisms”
that
need
to
exist,
at
a
minimum,
to
make
a
security
a
security.
Depending
on
where
Failla
comes
down
on
this
point
will
determine
whether
the
case
goes
into
the
discovery
phase.
There’s
indications
that
this
particular
judge
is
more
than
sympathetic
to
Coinbase’s
argument,
at
times
saying
the
SEC
set
too
“few
limitations”
for
itself
in
regulating
crypto
and
has
“too
broad”
an
interpretation
of
the
law.
Further,
in
a
memo
she
wrote
when
dismissing
a
lawsuit
against
Uniswap
founder
Hayden
Adams,
Failla
distinguished
between
decentralized
apps,
protocols
and
tokens,
in
an
“indication
of
how
careful
she
will
be
here,”
Chief
Legal
Officer
at
the
DeFi
Education
Fund
Amanda
Tuminelli
said.
While
it’s
easy
to
mock
the
idea
that
anything
that
could
conceivably
increase
in
value
could
be
regulated
as
a
security
by
the
SEC
(under
its
own
interpretation),
it’s
not
like
the
agency
doesn’t
have
arguments.
SEC
lawyer
Patrick
Costello
noted
that
when
people
buy
tokens,
“they
are
investing
into
the
network
behind
it.”
That’s
certainly
true
—
putting
aside
the
notion
that
some
tokens
have
utility
—
given
how
most
people
treat
investing
in
crypto.
Costello
was
also
right
to
say
you
can’t
“separate”
a
token
from
its
network,
in
a
blow
to
people
who
want
to
split
hairs
between
“securities”
and
“investment
contracts.”
Sometimes
a
cigar
is
a
cigar.
In
fact,
legal
expert
and
conceptual
artist
Brian
Frye
has
long
argued
that
most
markets
—
from
fine
art
to
wine,
and
yes,
including
crypto
—
likely
fit
under
the
agency’s
aegis,
even
if
it
hasn’t
yet
decided
to
regulate
them.
Frye,
although
something
of
a
securities
law
troll,
actually
sees
SEC
regulation
as
favorable,
in
part
because
it
usually
has
a
light
touch.
More
importantly,
it
would
help
clear
up
exactly
what
tokens
are
and
maybe
clear
the
way
for
people
to
start
using
them.
The
alternative
here
is
that
regulators
create
a
complete
and
total
taxonomic
system
for
every
type
of
token
and
their
different
uses,
which
seems
like
a
longshot
(at
least
without
messing
something
else
up).
In
the
end,
this
is
a
conceptual
battle
with
room
for
nuance.
As
Judge
Torres
found
in
SEC’s
lawsuit
against
Ripple,
sometimes
a
token
is
a
security
and
sometimes
it’s
not,
depending
on
the
circumstance.
Personally,
I’d
be
disappointed
if
Coinbase
won
at
this
stage,
because
it
wouldn’t
fundamentally
answer
the
question
of
whether
the
SEC
has
the
broad
ability
to
step
into
areas
that
look
like
securities.
We
can
all
laugh
about
the
SEC
regulating
stuffed
animals,
or
shudder
at
Failla’s
“Beanie
Baby
class
action”
thought-experiment.
But
what
if
Beanie
Babies
did
become
a
meaningful
part
of
the
global
economy,
and
people
really
were
investing
their
retirement
accounts
on
the
chance
“Patti
the
Platypus”
was
going
“up
only.”
What
exactly
would
be
the
difference
between
“being”
and
“resembling”
a
security?
