A federal judge in Manhattan Wednesday pressed attorneys for crypto exchange Coinbase and the Securities and Exchange Commission to plead their cases on whether digital assets are securities subject to regulation.
Coinbase is seeking the dismissal of an SEC lawsuit that accused the crypto exchange of trading more than a dozen tokens that should have been registered as securities.
The SEC also alleges that Coinbase has “intertwin[ed] the traditional services of an exchange, broker, and clearing agency without having registered any of those functions.”
Judge Katherine Polk Failla posited to SEC assistant chief litigation counsel Patrick Costello her concern that “what [the SEC is] asking for is to broaden the definition of what constitutes a security,” Reuters reported.
Costello said that crypto tokens are akin to an investment contract under the Howey test, because “[w]hen the value of the [blockchain] network or the ecosystem increases, so does the value of the [associated] token.”
Coinbase contends that the tokens at hand — SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO — aren’t securities at all, and that in purchasing crypto, purchasers aren’t signing contracts that grant them the earnings of a common enterprise.
“I’ll tell you this: I think there would have been a lot of surprise to find that an investment contract didn’t have anything to do with a contract,” said Coinbase attorney William Savitt, according to Reuters.
Coinbase’s legal team also sought to invoke the major questions doctrine, which states that Congress does not delegate government agencies issues of major political or economic significance — notably, a doctrine employed by the U.S. Supreme Court in its strike down of President Biden’s student loan forgiveness program.
Failla said that in her decade as a judge, she’d never come across the use of the major questions doctrine, Blockworks reported.
“I’m just not sure the crypto industry is so major or extraordinary that I have to find it here,” Failla said to Coinbase lawyer Sarah Eddy, noting that she doesn’t want to “take power I don’t have, to stop something I shouldn’t.”
Disagreeing with Failla, Eddy said that the major questions doctrine has been applied in cases impacting far fewer people, and that SEC Chair Gary Gensler himself has admitted to the crypto industry’s size and impact, per Blockworks.
Following Wednesday’s four-plus-hour hearing, Coinbase’s legal chief Paul Grewal tweeted, “After hours and hours, this much remain clear: the SEC continues to claim broad authority over all investments while offering no limiting principle to its definition of investment contract.”
“The SEC cannot unilaterally expand and redefine its own regulatory ambit. This should be left up to Congress and the ongoing legislative discussions about regulatory frameworks that are currently taking place,” he wrote. “Coinbase does not offer securities. We are confident in our legal arguments and look forward to a decision that will bring much needed clarity to the industry.”
For its part, a spokesperson for the regulator told Banking Dive, “You can’t adapt the law to fit your business model; you’ve got to adapt your business model to fit the law. As the SEC alleged, Coinbase was fully aware of the applicability of the federal securities laws to its business activities but deliberately refused to follow them.”
“The history of the crypto markets shows that investors are put at risk when these platforms disregard regulatory requirements,” the spokesperson said. “Coinbase has collected billions of dollars in transaction fees from investors while depriving them of required disclosures and protections.”
Failla did not decide the case Wednesday, and according to Blockworks, her decision could take months to deliver. She will either grant or deny Coinbase’s motion to dismiss the SEC’s suit in part or in full. If Failla lands on a partial dismissal, Coinbase and the SEC will move on to the discovery process.