Five hours in court, and the fate of Coinbase as a going concern hangs in the balance. On Wednesday, Coinbase and the U.S. Securities and Exchange Commission (SEC) sounded off in the Southern District of New York, arguing over whether the top securities watchdog’s lawsuit against the largest U.S. crypto exchange is valid.
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To the surprise of many, U.S. District Judge Katherine Polk Failla came prepared and seemed unusually open to hearing Coinbase out. It’s just one more data point showing that, even if Congress is unable to pass meaningful legislation, and executive agencies continue to “regulate by enforcement,” crypto can at least get a fair trial.
Coinbase is pushing to dismiss the case — and while no formal decision has been made, Failla did reportedly express concern that the SEC is misinterpreting U.S. securities laws and overstepping its bounds. The SEC’s case calls Coinbase’s business model into question.
If the agency wins, it could force Coinbase to delist tokens it deems to be securities (13 tokens were named in the complaint, but SEC Chair Gary Gensler said most cryptocurrencies resemble securities) and/or shut down certain corporate operations. Investment bank Mizuho described this as turning altcoins into “haltcoins.”
But just as the SEC is calling out a core aspect of Coinbase’s business, Judge Failla poked holes in one of the SEC’s central claims. Namely, Failla questioned the idea that when someone buys a token, they are buying into a “common enterprise” and “expect profits” based on the work of developers, which is the definition of security under the prevailing “Howey Test.”
See also: Gary Gensler’s Bitcoin ETF Clown Show
If that were the case, it’d open up the possibility of treating collectables like Beanie Babies as securities, Coinbase lawyer William Savitt noted, in an echo of Judge Failla’s broader concerns about over-regulating commodities. Savitt added that, unlike stocks or bonds, crypto tokens don’t necessarily grant holders rights over a network.
“Investment contracts have to have contracts,” he said, describing the types of legal “enforcement…
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