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As the court hearing progresses, the fate of Coinbase remains uncertain. If Judge Failla denies Coinbase’s motion for dismissal, the case will proceed to discovery.
The legal battle between the Securities and Exchange Commission (SEC) and Coinbase Global Inc (NASDAQ: COIN) reached a pivotal moment as New York District Judge Katherine Polk Failla questioned the SEC’s arguments and brought Senator Cynthia Lummis’ brief on 90 years of securities laws into sharp focus.
SEC’s Lawsuit against Coinbase
The SEC initiated legal proceedings against Coinbase in June, alleging that the platform operated as an unregistered exchange, broker, and clearing agency. Coinbase vehemently contested these claims, urging the court to dismiss the case and accusing the SEC of employing a “regulation by enforcement approach.”
During the court proceedings on Wednesday, January 17, Failla directed questions at the SEC regarding the definition of securities, the status of various tokens, and the applicability of the major questions doctrine.
In a notable revelation, Failla disclosed that she had received a brief from Senator Lummis, who advocated for the dismissal of the SEC’s case against Coinbase. The judge emphasized her reluctance to become an “activist judge” but acknowledged the significance of addressing the concerns raised by the senator.
While commenting on this, Eleanor Terret, a FoxBusiness News journalist, noted that Failla has obviously placed doubt on SEC arguments, and the fact that she is bringing up Lummis’ brief in such detail and asking the SEC to address it directly is noteworthy.
🚨NEW: I always want to be factual and correct in my reporting so am putting out a correction/clarification here. Some have pointed out that I may have missed the context in how Failla said this and that she was actually paraphrasing Lummis’s position on the 90 years of… https://t.co/XPIvgdESRG
— Eleanor Terrett (@EleanorTerrett) January 17, 2024
Failla also challenged the SEC on its classification of tokens, including SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO, as securities. She questioned whether the token issuers had violated securities laws, to which the SEC responded by emphasizing that these tokens were essentially computer code.
The judge also expressed reservations about the broad definition of securities, raising the concern that the SEC’s argument might encompass collectibles, even humorously referencing Beanie Babies. While the SEC clarified that it was not asserting collectibles as securities, Failla highlighted the fear that the argument might be too sweeping.
Failla also delved into the Howey Test, expressing the view that after 90 years of applying securities laws, new developments in the market required a fresh perspective. The SEC countered, asserting that one lawmaker’s opinion, even that of a senator, could not override Congress’s intent behind the Howey Test.
Future Implications and Expert Opinions
As the court hearing progresses, the fate of Coinbase remains uncertain. If Judge Failla denies Coinbase’s motion for dismissal, the case will proceed to discovery. Both parties could subsequently file motions for summary judgment before potentially heading to trial, a scenario unlikely until 2025.
Meanwhile, Adam Cochran, a Partner at CEHV, characterized the case as a “shitshow” and expressed confidence in Coinbase’s argument, predicting a victory for the platform.
It is worth mentioning that The SEC vs Coinbase case adds to a series of legal battles where judges have been tasked with determining the classification of cryptocurrencies as securities.
Notable examples include Judge Analisa Torres’ ruling on Ripple’s XRP sales, classifying it as non-securities on exchanges, and Judge Jed Rakoff’s recent decision favoring the SEC against Do Kwon and Terraform Labs.