Coinbase Challenges SEC in Intense Court Hearing, Argues Listed Tokens are Not Securities
In Brief
Manhattan Federal Judge Failla sought clarification from Coinbase on whether tokens listed on the platform could be deemed securities.
During court proceedings on Wednesday, Manhattan Federal Judge Katherine Polk Failla inquired with Coinbase, the company operating a cryptocurrency exchange platform, about the classification of tokens listed on it. She sought clarification on whether they could be deemed securities.
Katherine Polk Failla listened to arguments from both parties, directing her questions towards the legal precedent governing securities. She delved into the characteristics of various crypto tokens traded on platforms like Coinbase, exploring whether they meet the criteria set by the regulator to be considered investment contracts.
The Securities Act of 1933 provided a definition for the term “security,” but numerous experts commonly refer to a US Supreme Court case to assess whether an investment product qualifies as a security. A crucial criterion is whether individuals are entering into agreements to invest in a shared enterprise with the anticipation of profit.
Coinbase asserted that cryptocurrency assets, distinct from stocks and bonds, do not align with the definition of an investment contract. This stance is commonly shared by the majority of the cryptocurrency industry.
Coinbase’s lawyer, William Savitt, clarified that Coinbase does not assert that tokens listed on its platform can categorically be excluded from being considered securities.
Throughout the proceedings, he explored the definition of securities, emphasizing a perceived distinction between “investing in Beanie Baby Inc. and buying Beanie Babies,” referencing a 1990s trend where Americans purchased dolls with the anticipation that their value would appreciate.
He additionally mentioned that Coinbase agrees with the SEC’s position that a formal contract signed by a buyer is not obligatory for engaging in an investment contract. However, the mere act of token buyers reading white papers and other project-related information does not inherently imply that they are acquiring investment contracts.
Savitt countered the SEC’s argument, saying that selling tokens on Coinbase should be categorized as investment contracts solely based on the promises made by token projects to buyers. He contested the idea that buyers acquiring tokens with the anticipation of a price increase inherently transforms the transaction into an investment contract.
“There has to be a statement that is meant to convey an enforceable promise. That’s the irreducible minimum of what can be conceived to be an investment contract,” said William Savitt, Coinbase’s lawyer.
He pointed out a key distinction between blockchain tokens and securities. In the case of stocks, whether purchased directly from an issuer or on the secondary market, buyers receive all the rights associated with such securities. However, this is not universally applicable to tokens, highlighting a fundamental difference between the two.
Patrick Costello, SEC assistant chief litigation counsel, argued that the cryptocurrency tokens central to the case contribute to a broader “enterprise,” likening them to an investment contract. He emphasized that as the value of the network or ecosystem grows, so does the value of the associated token.
However, the Judge expressed to SEC attorneys her “concern” about the agency’s request to “expand the definition of what qualifies as a security.”
The SEC asserted that buyers of digital assets, even on secondary markets like Coinbase’s platform, were acquiring the tokens as investments resembling stock shares or bonds. However, Coinbase’s lawyers contested this viewpoint, highlighting that purchasers of these tokens did not enter into contracts entitling them to proceeds from a shared enterprise.
SEC and Coinbase Debate on Bitcoin and Past Court Decisions
During the debate, SEC and Coinbase attorneys disagreed on the classification of Bitcoin as a security. In the initial phase of the hearing, Patrick Costello from the SEC asserted that Bitcoin is not a security due to the absence of an ecosystem, suggesting that buyers do not invest in a common enterprise. In response, Coinbase’s Savitt countered in his closing statement, highlighting that Bitcoin indeed possesses an ecosystem, similar to other cryptocurrencies.
Additionally, other judges have taken a direct stance in deciding whether cryptocurrencies in question are securities or not. Katherine Polk Failla also inquired with Coinbase’s lawyer about the well-known Ripple case. In this instance, Judge Analisa Torres of the New York District Court ruled in July that certain programmatic sales of XRP by Ripple did not breach securities laws due to a blind bid process.
She also declared that other direct sales of the token to institutional investors were securities, leaving a partial win for the SEC.
SEC Targets Coinbase’s “Staking” Program
In its legal action, the SEC also focused on Coinbase’s “staking” program. This initiative involves pooling assets to validate activity on blockchain networks, earning commissions, and offering “rewards” to customers. According to the SEC, this program should have undergone registration with the agency.
Court Debates Future Proceedings
In June last year, the Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase, alleging it operated as an unregistered exchange, broker, and clearing agency. Coinbase has contested these allegations, advocating for the dismissal of the case.
The SEC alleged that the platform facilitated trading of at least 13 tokens, including SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO. The SEC contends that these tokens should have been registered as securities. Coinbase accused the regulator of employing a “regulation by enforcement approach.”
The judge refrained from making an immediate decision from the bench, stating that she is still contemplating certain aspects after the extensive four-hour hearing. In the probable scenario where the judge rejects Coinbase’s request for case dismissal, it would progress to the discovery phase. Following the discovery process, both the SEC and Coinbase have the option to file a motion for summary judgment.
If the judge remains unconvinced, the case would advance to trial and be presented to a jury, with a likely timeframe extending to 2025.
The judge’s decision is anticipated to carry significance for digital assets, contributing to the clarification of the SEC’s jurisdiction within the sector.
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Alisa is a reporter for the Metaverse Post. She focuses on investments, AI, metaverse, and everything related to Web3. Alisa has a degree in Business of Art and expertise in Art & Tech. She has developed her passion for journalism through writing for VCs, notable crypto projects, and scientific writing. You can contact her at alisa@mpost.io
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Alisa is a reporter for the Metaverse Post. She focuses on investments, AI, metaverse, and everything related to Web3. Alisa has a degree in Business of Art and expertise in Art & Tech. She has developed her passion for journalism through writing for VCs, notable crypto projects, and scientific writing. You can contact her at alisa@mpost.io
