The U.S. Securities and Exchange Commission (SEC) and Coinbase presented their arguments regarding whether transactions of certain tokens on the popular exchange constitute securities in a court hearing today.
The hearing, presided over by Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York, delved into the complexities of defining securities in the context of cryptocurrency transactions.
Both the SEC and Coinbase agreed that the tokens themselves are not securities. However, the SEC argued that the nature of each trade on Coinbase’s platform could be viewed as an investment contract. According to the SEC, if even one transaction is deemed an investment contract, it would imply that Coinbase has violated securities law. In contrast, Coinbase claims that these transactions are secondary-market trades without any contractual obligations, thus not qualifying as securities.
The SEC lawyer Patrick Costello argued that each token purchase equates to buying into a token ecosystem, with the expectation of sharing in its gains. He argues that the token’s value is intrinsically linked to its ecosystem.
On the other hand, Coinbase’s attorney, William Savitt, said that an investment contract, as defined by the Howey test, requires an enforceable contractual obligation between the token issuer and the buyer, which he contends is not present in these transactions.
Judge Failla carefully navigated through the arguments without revealing her stance. Her decision, expected in the coming weeks, will either support the SEC’s stance on treating crypto platforms as unregistered exchanges dealing with unregistered securities or challenge the regulator’s overreach.
The judge also addressed previous SEC crypto cases, including its loss against Ripple and its victory in the Terraform Labs action. She noted the difference in the Terraform case, which did not involve tokens listed on a secondary exchange, suggesting the complexity of applying these precedents to the current case.
The SEC sued Coinbase in June, alleging the exchange operated as an unregistered broker and clearing agency and that certain tokens traded on the platform, including SOL, ADA, and MATIC, were unregistered securities.
The hearing delved into various aspects of the case, including the nature of staking and the application of the major questions doctrine, which stipulates that clear congressional authorization is needed for agency decisions of major national significance. Failla also acknowledged receiving a brief from U.S. Senator Cynthia Lummis, who called for the case’s dismissal.
