What a Judge Said About the SEC’s Suit Against Coinbase

Between
Coinbase,
Custodia,
Roman
Storm
and
Sam
Bankman-Fried,
there
was
a

lot
of
news
last
week.
Let’s
get
to
it.

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Coinbase
and
Custodia
both
lost
early
and
preliminary
court
fights.
The

Coinbase
loss
was
more
or
less
expected
–
companies
rarely
win
much
on
a
motion
for
judgment
at
such
an
early
stage
–
but
still
pretty
enlightening.

At
some
point
the
cases
involving
the
U.S.
Securities
and
Exchange
Commission
are
going
to
move
to
appeals
courts
and
maybe
even
the
U.S.
Supreme
Court,
if
they’re
not
settled
first.
Until
that
point,
these
decisions
in
the
district
court
are
shedding
light
on
how
judges
view
the
crypto
industry.

Judge

Katherine
Polk
Failla
ruled
mostly
against
Coinbase
after

an
initial
motion
for
judgment,
dismissing
the
SEC’s
claims
about
Coinbase
Wallet
but
leaving
a
substantial
part
of
the
complaint
intact.

The
usual
disclaimers
apply:
This
is
an
initial
motion
and
the
judge
was
bound
to
accept
the
SEC’s
complaint’s
facts
as
alleged.
We
also
don’t
usually
see
cases
fully
dismissed
at
this
stage
anyway,
so
the
chances
of
Coinbase
succeeding
were
also
pretty
slim.

That
said,
the
judge
drew
a
pretty
clear
roadmap
in
her
84-page
ruling,
taking
on
common
industry
arguments
about
whether
crypto
meets
the
standards
for
the
major
questions
doctrine
(no),
what
a
cryptocurrency
ecosystem
means
in
terms
of
this
kind
of
litigation
(more
on
this
later),
whether
there
needs
to
be
a
written
contract
to
satisfy
the
terms
of
an
“investment
contract”
as
defined
in
SEC
v.
Howey
(no)
and
whether
some
of
the
assets
the
SEC
named
in
its
complaint
are
securities
(it’s
plausible).
In
her
ruling,
the
judge
rejected
some
of
Coinbase’s
arguments
about
how
cryptos
could
be
treated
in
the
U.S.

As
far
as
the
major
questions
doctrine
goes,
Judge
Failla

agreed
with
Judge
Jed
Rakoff,
who’s
in
the
same
district,
in
ruling
that
the
crypto
industry
does
not
meet
the
Supreme
Court’s
standards
for
what
might
be
a
major
industry.
In
doing
so,
she
became
the
latest
judge
to
say
that
the
SEC
is
well
within
its
bounds
to
pursue
enforcement
actions
and
regulate
crypto,
and
does
not
need
a
Congressional
mandate.
Failla
agreed
with
Rakoff
in
other
parts
of
her
order
as
well.

“Contrary
to
Defendants’
assertions,
neither
Howey
nor
its
progeny
have
held
that
profits
to
be
expected
in
a
common
enterprise
are
limited
just
to
shares
in
income,
profits,
or
assets
of
a
business,”
the
judge
wrote,
also
pointing
to
another
Supreme
Court
decision.

Again
citing
Rakoff,
Failla
said
a
common
enterprise
would
exist
if
a
token
issuer
used
proceeds
from
a
token
sale
“to
further
develop
the
tokens’
broader
‘ecosystem.'”

Judge
Failla
explicitly
rejected
an
argument
that
there
needs
to
be
a
formal
contract
for
an
“investment
contract”
to
exist,
pushing
back
against
another
fairly
common
argument
in
these
kinds
of
cases.

“To
begin,
there
need
not
be
a
formal
contract
between
transacting
parties
for
an
investment
contract
to
exist
under
Howey,”
she
wrote.
“Indeed,
courts
in
this
Circuit
have
consistently
declined
invitations
by
defendants
in
the
cryptocurrency
industry
to
insert
a
‘contractually-grounded’
requirement
into
the
Howey
analysis.”

Arguments
that
cryptocurrencies
are
akin
to
Beanie
Babies
or
baseball
cards
fell
flat
before
the
judge,
as
did
the
suggestion
that
the
SEC
could
take
over
jurisdiction
on
“essentially
all
investment
activity”
if
a
formal
contract
isn’t
needed.

The
judge
seemed
to
suggest
that
any
crypto
is
part
of
a
common
enterprise
because
a
token
does
not
exist
as
an
individual
product.

“Unlike
in
the
transaction
of
commodities
or
collectibles
(including
the
Beanie
Babies
discussed
during
the
oral
argument…),
which
may
be
independently
consumed
or
used,
a
crypto-asset
is
necessarily
intermingled
with
its
digital
network
–
a
network
without
which
no
token
can
exist,”
she
wrote.

The
judge
also
looked
at
the
question
of
whether
Coinbase
listed
securities,
finding
that
the
regulator
did
plausibly
allege
that
with
at
least
two
of
them,
solana
(SOL)
and
chiliz
(CHZ),
holders
could
“reasonably
…
expect
to
profit”
from
Solana
Labs
or
the
Chiliz
team’s
efforts
around
their
respective
tokens.

“The
parties
do
not
dispute
that,
to
prevail
on
its
claims,
the
SEC
need
only
establish
that
at
least
one
of
these
13
Crypto-Assets
is
being
offered
and
sold
as
a
security,
and
that
Coinbase
has
intermediated
transactions
relating
therewith,
such
that
transacting
in
that
Crypto-Asset
would
amount
to
operating
an
unregistered
exchange,
broker
or
clearing
agency,”
the
order
said.

The
case
will
now
move
into
the
discovery
phase,
with
both
parties
facing
an
April
deadline
to
work
together
on
a
case
management
plan.
Presumably
the
case
will
heat
up
after
that,
as
the
parties
argue
over
who
gets
what
and
exchange
documents.

If
you’ve
got
thoughts
or
questions
on
what
I
should
discuss
next
week
or
any
other
feedback
you’d
like
to
share,
feel
free
to
email
me
at

nik@coindesk.com
or
find
me
on
Twitter

@nikhileshde.

You
can
also
join
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conversation
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See
ya’ll
next
week!