A federal judge in Manhattan grilled Coinbase and the US securities regulator on Wednesday about their opposing 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 accusing the largest cryptocurrency exchange in the United States of violating its rules.
Judge Katherine Polk Failla heard arguments from both sides on Wednesday, focusing her questions on the legal precedent for defining securities and the characteristics of several crypto tokens traded on Coinbase and elsewhere that the regulator considers investment contracts.
Coinbase and the SEC set to face off in federal court over regulator’s crypto authority
Failla did not decide on the bench, stating that she was still considering some questions following the more than four-hour hearing.
The judge’s ruling is likely to have an impact on digital assets by clarifying the SEC’s jurisdiction over the sector.
The case is one of several that the SEC has brought against the cryptocurrency sector. The agency initially focused on companies selling digital tokens, but under chair Gary Gensler’s leadership, it has shifted its focus to firms offering trading platforms and clearing activity, as well as broker-dealer services.
The SEC sued Coinbase in June, alleging that the company facilitated the trading of at least 13 crypto tokens, including Solana, Cardano, and Polygon, which it claimed should have been registered as securities.
The Securities Act of 1933 defined the term “security,” but many experts rely on a U.S. Supreme Court case to determine whether an investment product is a security. A key test is whether people agree to invest in a common enterprise with the expectation of profit.
Coinbase vs. SEC: What is the whole case?
Coinbase, the world’s largest publicly traded cryptocurrency exchange, has argued that, unlike stocks and bonds, crypto-assets do not meet the definition of an investment contract, a view shared by the vast majority of the crypto industry.
Lawyers for the SEC argued that securities differ from purchases of collectibles such as baseball cards or even Beanie Babies, citing a 1990s trend in which Americans purchased the dolls with the expectation that they would increase in value.
Patrick Costello, SEC assistant chief litigation counsel, contended that the crypto tokens at the center of the case support a larger “enterprise,” making them similar to an investment contract.
“When the value of the network or the ecosystem increases, so does the value of the associated token,” he said.
Nonetheless, Failla told SEC attorneys she was “concerned” about the agency’s request to “broaden the definition of what constitutes a security.”
According to the SEC, buyers of digital assets, including those on secondary markets like Coinbase’s platform, were purchasing the tokens as investments similar to stocks or bonds.
However, Coinbase’s lawyers disagreed, pointing out that buyers of such tokens were not signing contracts that entitled them to the proceeds of a common enterprise.
“I’ll tell you this: I think there would have been a lot of surprise to find that an investment contract didn’t have anything to do with a contract,” said William Savitt, a lawyer for Coinbase.
The judge appeared to dismiss Coinbase’s argument that the lawsuit violates the so-called major questions doctrine. That legal principle is based on a Supreme Court decision stating that federal agencies cannot regulate without specific congressional authorization.
The SEC’s lawsuit also targeted Coinbase’s “staking” program, in which it pools assets to verify activity on blockchain networks and charges commissions in exchange for “rewards” for customers. The SEC stated that the program should have been registered with the agency.
