Legal Battle Unfolds: Coinbase Crypto Exchange and US SEC Clash in Court Over Classification of Digital Assets as Securities

Coinbase Requests Dismissal of SEC Lawsuit, Contending Allegations of Violating Regulatory Rules.

A federal judge in Manhattan on Wednesday grilled Coinbase and the US securities regulator about their divergent views on whether and when digital assets are securities, in a case closely watched by the cryptocurrency industry.

Coinbase has asked the court to dismiss the Securities and Exchange Commission’s lawsuit alleging the largest US crypto exchange is flouting its rules.

Judge Katherine Polk Failla on Wednesday heard arguments from both sides, focusing her questions on the legal precedent defining securities, and the attributes of several crypto tokens traded on Coinbase and elsewhere that the regulator has deemed investment contracts.

Failla did not decide the matter from the bench, noting she was still weighing some questions after the more than four-hour hearing.

The judge’s ruling is likely to have implications for digital assets by helping to clarify the SEC’s jurisdiction over the sector.

The case is one of a slew the SEC has brought against the crypto sector. The agency focused initially on companies selling digital tokens, but under the leadership of chair Gary Gensler has targeted firms offering trading platforms and clearing activity, and acting as broker-dealers.

The SEC sued Coinbase in June, saying the firm facilitated trading of at least 13 crypto tokens, including Solana, Cardano and Polygon, which it said should have been registered as securities.

The Securities Act of 1933 outlined a definition of the term “security,” yet many experts rely on a US Supreme Court case to determine if an investment product constitutes a security. A key test is whether people are contracting to invest in a common enterprise with the expectation of profit.

Coinbase, the world’s largest publicly traded cryptocurrency exchange, has argued that crypto assets, unlike stocks and bonds, do not meet that definition of an investment contract, a position held by the vast majority of the crypto industry.

Lawyers for the SEC argued that securities differ from purchases of collectibles like baseball cards or even Beanie Babies, referencing a 1990s trend in which Americans bought the dolls with the expectations they would rise in value.

Patrick Costello, SEC assistant chief litigation counsel, argued that the crypto tokens at the heart of the case support a larger “enterprise,” making them akin to an investment contract.

“When the value of the network or the ecosystem increases, so does the value of the (associated) token,” he said.

The statements you provided seem to be related to a legal dispute between Coinbase and the U.S. Securities and Exchange Commission (SEC) regarding the classification of certain digital assets and the SEC’s attempt to regulate them. The SEC claims that buyers of digital assets on platforms like Coinbase are essentially making investments similar to buying stocks or bonds. However, Coinbase argues that these buyers are not signing contracts that entitle them to the proceeds of a common enterprise.

The disagreement extends to the SEC’s scrutiny of Coinbase’s “staking” program, where assets are pooled to validate activities on blockchain networks. The SEC contends that this program should have been registered with the agency.

The issue also touches on the interpretation of the “major questions doctrine,” which is based on a Supreme Court ruling stating that federal agencies cannot regulate without specific congressional authorization.

The outcome of this legal battle will likely have implications for the regulatory framework surrounding digital assets and how they are classified by regulatory bodies like the SEC. It’s a complex and evolving area of law as cryptocurrencies and related technologies continue to gain prominence.