Coinbase Accuses SEC of Bypassing Howey Test in Fresh Appeal Over Key Legal Battle

By Jody McDonald May 27, 2024 In Coinbase, SEC
  • In a new filing related to Coinbase’s request for an appeal in its legal battle with the SEC, the exchange has challenged the regulator’s interpretation of the Howey test.
  • Coinbase says the SEC’s opposition to its appeal request fails to address the critical question of “whether a digital asset transaction carrying no post-sale obligations can be an “investment contract”.”

The world’s largest crypto exchange, Coinbase, has accused the US Securities and Exchange Commission of avoiding providing clarity on the fundamental question of whether crypto transactions constitute “investment contracts” under the Howey test.

In a motion filed by Coinbase for an interlocutory appeal with the US District Court for the Southern District of New York on May 24, the exchange said no court had satisfied the legal question of whether crypto qualifies as a security under the Howey test, and that “the SEC seeks to side-step the test.”

Coinbase argued that granting its appeal “…is warranted to resolve the novel and controlling question of law presented, to guide the conduct of this litigation, and to bring much-needed clarity to the burgeoning crypto industry.”

In making its case for an appeal against the SEC’s enforcement action, Coinbase questioned the SEC’s position, highlighting a “deepening disagreement” between the regulator and US legislators, given the historic passing of a major crypto bill in May (FIT21):


…Just this week, the U.S. House of Representatives approved on a bipartisan basis comprehensive digital asset legislation that would deny the SEC the expansive jurisdiction it claims.


Related: FIT21 Crypto Bill Passes US House with Bipartisan Support, Will President Biden Veto?

Judge Katherine Polk Failla said the SEC had plausibly argued that Coinbase “operated as an unregistered intermediary of securities” in a decision handed down on March 27. The appeal motion was denied for the most part, although the judge did dismiss claims related to Coinbase acting as an unregistered broker through its Wallet application.

On the difference of opinion about what qualifies as a security, Judge Failla said:

…the “crypto” nomenclature may be of recent vintage, but the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years.

Judge Katherine Polk Failla

Another Win For SEC As Case Moves Forward

The SEC’s lawsuit initiated in 2023 claims Coinbase has operated as an unregistered securities exchange, broker and clearing agency, and failed to register the offer and sale of its crypto asset staking-as-a-service program.

Related: Judge Sides With SEC, Advancing Case Against Coinbase in Setback for Crypto Industry

A motion for dismissal by Coinbase was denied in March 2024, ensuring the court case would proceed. Coinbase’s latest appeal sought to have portions of the SEC’s case against it dropped with regard to the exchange’s platform and Prime services—which account for more than 70% of the complaint. 

In a series of posts on social media site X, Coinbase Chief Legal Officer Paul Grewal said Coinbase had been prepared for the appeal’s denial, stating:

Early motions like ours against a government agency are almost always denied. But clarity is the ultimate goal and today’s decision continues us on that path.

Paul Grewal, Coinbase

Jody McDonald

Jody McDonald

Jody is a Brisbane-based freelance writer who specialises in writing about business, technology, and the future of work.

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