In a significant development, the Securities and Exchange Commission (SEC) has intensified its legal battle with cryptocurrency exchange Coinbase, accusing the platform of facilitating the trading of unlisted securities. This comes on the heels of the SEC’s recent approval of Exchange-Traded Products (ETPs) for 11 spot bitcoin ETFs, marking a pivotal moment in the evolving regulatory landscape.
The SEC’s contention against Coinbase is centered around the application of the SEC v. W. J. Howey Co. case, a landmark decision by the Supreme Court in 1946 that clarified the Securities Act of 1933. Notably, the SEC had been challenged earlier when a judge overturned their objection, asserting that the approval of a bitcoin futures ETF paved the way for a spot ETF.
The Securities Act of 1933, enacted to regulate securities and protect investors, surprisingly did not provide a definition for what constitutes a security. Howey played a crucial role in filling this void, offering a set of criteria to determine the characteristics of an investment contract. The main criteria include the existence of an investment contract and the laying out of capital with the expectation of profit through the efforts of others.
The SEC’s specific allegations against Coinbase involve the platform operating as a broker, exchange, and clearing agency rolled into one for certain securities, including SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO. The SEC argues that these assets fall under their regulatory purview based on the Howey framework and the Securities Act.
The central issue revolves around whether these tokens contribute to the development of ecosystems and platforms, creating additional value for the tokens, and if their whitepapers imply profits through the efforts of others. The lack of clarity in the original definitions from 1933 has become a focal point, as the Congress of that era could not have foreseen the evolution of securities in the digital age.
Senator Cynthia Loomis, in an Amicus brief, contends that the SEC lacks the authority to regulate tokens without congressional action. Meanwhile, Judge Failla suggests adherence to the Major Powers doctrine, emphasizing the separation of powers between government branches. The Major Powers doctrine implies that the judiciary is tasked with interpreting laws due to legislative inaction.
Judge Failla’s comments indicate a potential inclination towards ruling against the SEC. In a related context, the staking case involving token pooling adds complexity, where the determination of whether facilitating such activities constitutes engaging in protected security activity depends on the definition of profit through the efforts of “others.”
In the backdrop of these legal proceedings, recent news reveals that out of the 11 spot bitcoin ETFs, Coinbase serves as the custodian for nine, highlighting a concentration risk that adds another layer of scrutiny to the ongoing SEC vs. Coinbase saga.
