Coinbase, a prominent cryptocurrency exchange, experienced a 6% increase in its stock price as optimism surrounding the approval of a Bitcoin spot exchange-traded fund (ETF) grew. This surge could mark a turning point for Coinbase, embroiled in legal battles with the U.S. Securities and Exchange Commission (SEC) in Manhattan federal court.
As a background, the SEC had charged Coinbase with various violations, including operating as an unregistered securities exchange, broker, and clearing agency. Additional allegations revolved around the unregistered offering and sale of securities linked to its staking-as-a-service program.
Coinbase’s Fierce Fight with SEC
Coinbase’s response to these charges has been to push back strongly, asserting that the SEC’s jurisdiction is limited to securities transactions. The exchange argues that “investment contracts,” in which the SEC claims are involved, must provide purchasers with a contractual claim related to a business enterprise’s future income, profits, or assets to qualify as securities. Because the SEC’s complaint fails to establish that the asset trades identified involve ongoing contractual obligations tied to a business enterprise, Coinbase contends it should be entitled to judgment.
SEC’s See it Differently
According to the SEC’s perspective, any transaction involving a purchase with an expectation of increased value or the commitment of capital could fall under their purview, which Coinbase argues is overly broad. To illustrate their point, Coinbase presents a hypothetical involving an artist selling paintings on Etsy with the intent to exhibit her work, suggesting that the SEC’s interpretation would classify each sale and resale as a securities transaction.
The SEC has relied on the Howey Test, a precedent set by a 1946 U.S. Supreme Court case concerning citrus groves, to determine the nature of transactions as investment contracts subject to securities laws. Coinbase alleges that the SEC has stretched the Howey Test’s scope “beyond recognition.”
A Motion for a Motion, Expert’s Chimed In
Legal experts, including John E. Deaton, founder of CryptoLaw US, have opined that Coinbase’s motion to dismiss is quite robust. Deaton, an Amicus Curiae attorney, suggests that a successful outcome for Coinbase, in this case, could significantly impact the cryptocurrency industry, as it may establish a precedent exempting secondary market blind bid/ask transactions from the Howey Test.
While Coinbase maintains its position in court, other regulators, such as the North American Securities Administrators Association, have supported the SEC. They argue that digital assets should not be considered “special” in the eyes of the law.
All Depends on Judge Now…
The SEC-Coinbase lawsuit is before Judge Katherine Polk Failla. Her case management and prospective outcomes could shape Bitcoin regulation in the US. Obama appointed Failla in 2013, and she recently dismissed a class action case against Uniswap Labs, suggesting her unwillingness to broaden federal securities rules without congressional authorization.
