SEC v. Coinbase hearing: Judge thinks the definition of securities may be too broad, ruling may be issued within weeks

The ruling in the case will hinge on whether trading in any of a dozen crypto tokens should be classified as unregistered securities.

Written by: Felix, PANews

On January 17, Coinbase held a court hearing with the U.S. Securities and Exchange Commission (SEC) regarding previous accusations. During the nearly five-hour hearing, U.S. District Judge Katherine Polk Failla of the Southern District of New York questioned both sides on their respective arguments.

In June last year, the SEC accused Coinbase of illegally operating an unregistered stock exchange, brokerage, and clearing agency, and its crypto staking services involved the unregistered sale and issuance of securities. Coinbase has disputed these claims, arguing for the case to be dismissed and accusing regulators of using an “enforcement regulatory” approach.

Whether token trading is a security is still the core argument

SEC attorney Patrick Costello argued that the crypto tokens in question are part of a larger enterprise (i.e., a blockchain network) and are therefore similar to investment contracts. He added that as the value of the network or ecosystem grows, the value of each token will increase. By extension, as the case develops, each asset can be considered a security.

Judge Failla questioned this, saying: “I’m really concerned…that the definition of a security as you view it may be too broad.”

Coinbase attorney William Savitt noted that Coinbase is not claiming that the tokens listed on its website can never be considered securities.

“We do not believe that token transactions can ever be investment contracts.” However, the SEC did not raise any allegations in its lawsuit that met the definition of an investment contract. He also said Coinbase agrees with the SEC that entering into an investment contract does not require the buyer to sign a formal contract. However, the fact that a token buyer reads the white paper and other information about the token project does not mean that they are purchasing an investment contract.

Savitt also pushed back against the SEC’s argument that selling tokens on Coinbase should be considered an investment contract simply because the token project may have made certain promises to buyers, who purchased the tokens in the hope that prices would increase.

“There must be a statement intended to convey an enforceable commitment. This is the most basic condition that cannot be ignored for what can be considered an investment contract.”

Savitt said the real difference between blockchain tokens and securities is that whoever buys the shares directly from the issuer or on the secondary market gets all the rights that these securities give the holder, but This is not the case for tokens.

There is disagreement over why Bitcoin is not a security

During the argument, SEC and Coinbase lawyers disagreed over why Bitcoin is not a security.

During the first part of the hearing, SEC attorney Patrick Costello mentioned Bitcoin, noting that it is not a security because “there is no ecosystem behind Bitcoin” and therefore people who buy Bitcoin are not investing in ordinary businesses. Coinbase attorney Savitt echoed this argument in closing arguments, noting that Bitcoin certainly has an ecosystem, just like any other cryptocurrency.

It is undecided whether the “Major Issues Principle” applies

During the hearing, regarding the major issues principle invoked by Coinbase, Judge Failla admitted that he was hesitant to apply the “nuclear option” of the major issues principle to this case. He pointed out that this principle rarely forms part of court decisions and that no one has asked about it since Failla has been a judge for 10 years, so there is “natural hesitation”.

*(Note: In the U.S. Senate, the nuclear option is a procedural procedure that allows the Senate to override daily rules with a simple majority, rather than the two-thirds supermajority typically required by Senate rules). *

This principle states that if an agency wants to make decisions on issues of national significance, it must be supported by an express authorization from Congress. Coinbase argued that this principle applies to this case and that the SEC is seeking to infringe on congressional authority and take steps that “have the effect of legislation.” Coinbase therefore believes that the doctrine should block SEC action until Congress has a chance to enact crypto laws.

Previous encryption litigation judgments may not affect this case

Judge Failla also discussed rulings in several past crypto cases, including the SEC’s defeat against Ripple and its victory in the Terraform Labs lawsuit.

Judge Failla said it was “not a shock to me” that Judge Jed Rakoff held in the Terraform case that crypto-asset transactions were securities. But this does not involve listing the token on a secondary exchange. “Terrraform is completely different from the facts of this case.”

But regardless, similar cases filed by the SEC against exchanges such as Binance and Kraken may still influence Judge Failla’s views.

A ruling may be made within a few weeks

While the hearing explored each service in detail, the hearing was specifically scheduled to allow Judge Failla to carefully consider Coinbase’s motion to dismiss the case entirely.

Judge Failla has not yet announced a decision on whether to dismiss all or part of the lawsuit, and the ruling will be made in conjunction with other recent decisions by other judges in the same court (Judge Failla did not hint at a specific timing, but it may be in writing in the coming weeks) form).

If the judge denies Coinbase’s request to dismiss the case, which is likely, the case will move into the evidentiary phase. After the investigation is completed, both the SEC and Coinbase can file motions for summary judgment.

It is worth mentioning that at multiple points during the hearing, the judge praised an amicus brief filed by the crypto lobby group DeFi Education Fund, which detailed the technical nature of the Coinbase wallet and Coinbase staking program, which the group argued None of the items fall within the jurisdiction of the SEC.

Reference: The Block, CoinDesk, Decrypt, Cryptoslate