Coinbase vs. SEC: A Battle for Crypto Supremacy

The judge presiding over Coinbase’s motion to dismiss (MTD) in the case brought against it by the US Securities and Exchange Commission (SEC) has expressed concern the regulator is trying to extend its powers too broadly.

During the hearing in Manhattan on Wednesday Judge Katherine Polk Failla suggested the SEC’s preferred interpretation of the Howey Test — the test used in the US to determine if something is a security — was too broad. To assist her decision making, the judge asked Coinbase’s lawyers to analyse previous cases involving Terraform Labs and Ripple, as reported by journalist Eleanor Terrell via X. 

Judge Failla is asking Coinbase's lawyer to break down the Terraform decision from Judge Rakoff and the Ripple decision from Judge Torres with regards to investment contracts on the primary and secondary markets and if there's anything she should be looking for in those decisions…

— Eleanor Terrett (@EleanorTerrett) January 17, 2024

Terret said that lawyers for the crypto exchange explained that while the two earlier cases were quite different, both found that an investment contract was required for an investment to constitute a security, which crypto purchases lack.

Judge Concerned SEC Overstepping The Mark

In the hearing, which lasted almost five hours, Judge Failla said of the SEC’s view of the Howey Test: “I am concerned that what you’re asking for is too broad.” 

She later expressed concern that if the SEC’s interpretation was allowed, the regulator could have jurisdiction over almost any assets, including collectibles and commodities:

Coinbase’s lead counsel, William Savitt argued that until crypto came along everyone, including the SEC, had agreed that securities require contracts between buyer and seller — and that these contracts have to be actual contracts, not just implied. Savitt said: “Everybody has always known that investment contracts have to have contracts.”

Posting on X, crypto lawyer MetaLawMan claimed that there was a general consensus in the hearing that digital asset tokens are not “in and of themselves securities”, but the SEC nonetheless argued that the sale of them on secondary markets, such as Coinbase, could still constitute the sale of securities. 

SEC v. @Coinbase Update V (last)

The long awaited hearing is over.

As expected, there was no ruling from the Judge.

There were no knockout blows delivered by either side and, frankly, not a lot of high points over the course of the 5 hour hearing.

The Judge was the star of…

— MetaLawMan (@MetaLawMan) January 17, 2024

Hearing To Determine Fate Of Case  

If Judge Failla grants Coinbase’s motion to dismiss, that’ll be the end of the matter. If not, the case will continue on to the discovery phase. A decision is expected to take anywhere from a few days to several months to be handed down.

The case against Coinbase was brought by the SEC last June. In it, the regulator accuses the crypto exchange of operating as an unregistered broker, exchange and clearing agency — alleging it sold 13 cryptocurrencies, including ADA, MATIC and SOL as unregistered securities.

MetaLawMan says he believes it’s likely the case will be allowed to continue, but that ultimately it’ll be found in favour of Coinbase: