A federal judge in Manhattan engaged in a rigorous questioning session on Wednesday with Coinbase (COIN.O) and the U.S. Securities and Exchange Commission (SEC), delving into their conflicting perspectives on the classification of digital assets as securities. The outcome of this closely monitored case holds significant implications for the cryptocurrency industry.
Coinbase has formally requested the court to dismiss the SEC’s lawsuit, alleging that the prominent U.S. crypto exchange is in violation of regulatory rules. Judge Katherine Polk Failla presided over the hearing, focusing her inquiries on the legal precedents governing securities and examining the attributes of various crypto tokens, including Solana, Cardano, and Polygon, traded on Coinbase and other platforms, which the SEC has designated as investment contracts.
Following the more than four-hour hearing, Judge Failla refrained from delivering an immediate verdict, stating that she was still deliberating on certain aspects of the case. The judge’s eventual ruling is anticipated to provide clarity on the SEC’s jurisdiction over the digital asset sector.
This lawsuit is part of a series initiated by the SEC against the crypto industry. Under the leadership of Chair Gary Gensler, the agency has expanded its focus beyond companies dealing in digital tokens to include those offering trading platforms, clearing activities, and acting as broker-dealers.
The SEC initiated legal proceedings against Coinbase in June, asserting that the exchange facilitated the trading of at least 13 crypto tokens, such as Solana, Cardano, and Polygon, which, according to the SEC, should have been registered as securities.
While the Securities Act of 1933 outlines the term “security,” experts often refer to a U.S. Supreme Court case to determine if an investment product qualifies as a security. A crucial criterion is whether individuals are entering into agreements to invest in a collective enterprise with the expectation of profit.
Coinbase, the world’s largest publicly traded cryptocurrency exchange, contends that crypto assets, unlike stocks and bonds, do not meet the definition of an investment contract, a stance shared by the majority of the crypto industry.
SEC lawyers argue that securities differ from purchases of collectibles, citing examples like baseball cards or Beanie Babies. Patrick Costello, SEC Assistant Chief Litigation Counsel, emphasized that the crypto tokens at the center of the case support a larger “enterprise,” likening them to an investment contract.
However, Judge Failla expressed reservations about the SEC’s attempt to expand the definition of what constitutes a security. The SEC posits that buyers of digital assets, even on secondary markets like Coinbase’s platform, are acquiring tokens as investments akin to stocks or bonds. In contrast, Coinbase’s legal team contends that buyers of such tokens are not entering contracts entitling them to the proceeds of a common enterprise.
Addressing Coinbase’s argument that the lawsuit involves the “major questions doctrine,” a legal principle preventing federal agencies from regulating without specific congressional authorization, Judge Failla appeared dismissive.
The SEC’s lawsuit also targeted Coinbase’s “staking” program, which pools assets to verify activity on blockchain networks, takes commissions, and provides “rewards” to customers. The SEC asserts that this program should have been registered with the agency.
