Coinbase in a recent courtroom confrontation presented its case against the Securities and Exchange Commission (SEC), arguing that the tokens listed on its exchange do not constitute securities.
This legal battle follows a lawsuit filed by the SEC in June, accusing Coinbase of operating as an unregistered exchange, broker, and clearing agency. New York District Judge Katherine Polk Failla, presiding over the case, probed Coinbase on Wednesday about its token listings, but withheld immediate judgment, indicating a decision on whether to dismiss the case will not be made yet.
Coinbase has vehemently refuted the SEC’s allegations, criticizing the regulator for its approach of “regulation by enforcement” and seeking dismissal of the case.
Coinbase’s Court Defense Against SEC
During a critical court session on Wednesday, New York District Judge Katherine Polk Failla questioned Coinbase regarding the nature of the tokens listed on its exchange. This inquiry stems from a lawsuit initiated by the Securities and Exchange Commission (SEC) in June, where Coinbase was accused of functioning as an unregistered exchange, broker, and clearing agency.
In response, Coinbase has strongly contested these allegations, seeking to dismiss the case and criticizing the SEC’s approach as one of “regulation by enforcement.”
Coinbase’s attorney, William Savitt, focused on the legal definitions of securities, drawing a distinction between investing in a company and purchasing its products, likening it to the difference between investing in a company like “Beanie Baby Inc.” and buying Beanie Babies themselves.
Savitt emphasized that while Coinbase doesn’t deny that tokens could potentially be classified as securities, the SEC’s current allegations don’t meet the criteria of an investment contract as defined in securities law.
Savitt agreed with the SEC on the point that a formal contract isn’t necessary for an investment contract, but he argued that merely reading white papers or other informational material about token projects doesn’t constitute an agreement to an investment contract.
He further countered the SEC’s argument that the sale of tokens on Coinbase should automatically be considered investment contracts, pointing out that there must be an enforceable promise for such a classification.
Highlighting a fundamental difference between blockchain tokens and traditional securities, Savitt argued that while stock purchasers acquire certain rights, this is not necessarily the case with token holders. This distinction, he argued, is crucial in understanding why tokens should not automatically be classified as securities.
Judge Failla’s Skepticism on the Major Questions Doctrine
The judge also expressed reservations regarding the major questions doctrine, a legal principle invoked by Coinbase in its defense. This doctrine stipulates that an agency must have clear congressional authorization to decide on issues of major national significance. However, Judge Failla expressed reluctance in applying this doctrine, which she noted is rarely used in court decisions.
Her concern is that by acceding to Coinbase’s request, she might inadvertently exceed judicial authority, mirroring the overreach Coinbase accuses the SEC of. Failla’s decade-long tenure on the bench has seldom seen the doctrine being brought up, and she indicated a natural hesitation to employ it due to its infrequent use in legal precedents.
Uncertain Path Ahead in Coinbase-SEC Legal Dispute
Concluding the hearing, Judge Failla acknowledged that while some of her queries were addressed, many remain unanswered, preventing an immediate decision from the bench. Should Judge Failla decide against dismissing the case, as appears likely, the lawsuit would move into the discovery phase.
This phase would allow both the SEC and Coinbase to gather more evidence, potentially leading to motions for summary judgment. If the case remains unresolved post-discovery, it would proceed to trial, possibly not occurring until 2025. The prospect of a jury trial looms if the summary judgments fail to bring closure, setting the stage for a prolonged legal battle between Coinbase and the SEC.
