In a five-hour face-off before United States District Judge Katherine Polk Failla, the Securities and Exchange Commission (SEC) and Coinbase presented arguments regarding the crypto exchange’s motion for dismissal of a lawsuit filed by the SEC in June 2022. The extensive hearing covered key issues in the legal landscape of the crypto space, assets, and the regulatory role of the SEC.
Judge Failla scrutinised the SEC’s case against Coinbase during the hearing, particularly questioning the applicability of the Howey test to digital token issuance. She expressed concerns about the case being too broad and sought clarification on why a digital token issuance would meet the Howey test.
SEC v @coinbase Update IV
In an unusual move, the Judge dispensed with any prepared arguments from either side and instead went straight to questioning the lawyers.
The first 2 hours was spent exclusively questioning of the SEC lawyers.
The SEC lawyers were better prepared…
— MetaLawMan (@MetaLawMan) January 17, 2024
The SEC asserted that buyers of tokens are essentially investing in the underlying network or ecosystem, highlighting a value proposition behind token purchases. Coinbase’s attorneys countered this argument, drawing a parallel with Bitcoin, which was characterised as a commodity by an SEC attorney, asserting that Bitcoin also has a community and network backing.
The hearing also explored the definitions of staking and secondary market transactions, referencing recent court rulings involving crypto firms like Ripple and Terraform Labs. Notably, the SEC introduced the Terraform Labs case as evidence, emphasising a recent ruling that concluded the sale of digital assets as securities without registration.
The SEC contended that Coinbase was attempting to establish a modified version of the Howey test, allowing the trade of crypto tokens offering access to ecosystems it deemed a “common enterprise.” The SEC argued that Coinbase independently applied the Howey test, leading to inconsistent interpretations, providing grounds for the case to proceed.
Coinbase’s legal team disputed this, stating that the Terraform Labs case differed as it did not involve secondary market transactions and was based on a private relationship between investors and the company. They also explored the legal requirements for an investment contract under U.S. law, highlighting the necessity of a financial arrangement with the expectation of earning a profit.
The discussion extended to the distinction between stocks and crypto tokens, with Coinbase asserting that token holders don’t receive dividends or legal rights over a project, unlike stockholders. This argument stemmed from the Ripple ruling in July 2023, where Judge Analisa Torres determined that XRP was not a security when sold via programmatic sales but was a security when sold to institutional investors.
Coinbase maintained that blind trades between individuals on its platform do not constitute an investment agreement, challenging the SEC’s claim that the exchange violated federal securities laws by listing 13 tokens as securities. These tokens include Solana, Cardano, Polygon, Filecoin, The Sandbox, Axie Infinity, Chiliz, Flow, Internet Computer, NEAR, Voyager, Dash, and Nexo. The SEC filed the lawsuit on June 6, 2023, alleging violations of federal securities laws.