On January 17, a court hearing took place between Coinbase and the US Securities and Exchange Commission (SEC) regarding previous charges.
In June 2023, the SEC alleged that Coinbase illegally operated an unregistered national securities exchange, broker, and clearing agency and that its crypto staking service involved the unregistered sale and offering of securities.
Although Judge Katherine Polk Failla did not rule today, she expressed her concerns in line with those of Coinbase.
According to Reuters, Judge Failla commented on 13 crypto tokens that Coinbase allows customers to access but not issue, and which the SEC considers securities. The judge questioned the SEC’s arguments and stated:
“I am concerned… that you are asking for an expansion of the definition of what constitutes a security.”
Patrick Costello, the SEC’s assistant chief trial attorney, instead argued that the crypto tokens in question are part of a larger enterprise (i.e. the blockchain network) and are therefore akin to investment contracts. He added that the value of each token increases as the value of the network or ecosystem grows. By extension, any asset can be considered a security as the case develops.
According to The Block, Costello admitted that token issuers had “not exactly” violated securities laws. The companies behind Cardano (ADA), Solana (ADA), and Polygon (MATIC) have previously denied the securities status of these assets and are not named as defendants in the SEC’s case against Coinbase.
The dismissal was also discussed during the hearing
FOX Business reporter Eleanor Terrett also covered the hearing. According to Terrett’s report, Judge Failla asked the SEC why it should not dismiss the case, a course of action that Coinbase itself had requested.
The judge cited Senator Cynthia Lummis’ support for a resignation, calling Lummis “not just any senator” but “deeply committed to space.” The judge paraphrased an earlier statement in which Lummis suggested the obsoleteness of securities testing, stating: “We’ve had a good run. We have been able to apply these securities laws to these markets for 90 years.”
Terrett continued describing closing arguments. The SEC argued that Coinbase misapplied the 1934 Howey Test and denied any “easy fix.”
Coinbase responded that the SEC has not shown that token issuers have done anything that could be considered a contract with Coinbase customers, stating:
“The Commission’s complaint takes the court into completely unprecedented territory. The SEC must monitor enforcement and regulatory actions that give meaning to the statutory language [don’t] turn it upside down. This is several bridges too far and for that reason we ask you to ignore it [the SEC’s case] complete.”
Despite her critical stance toward the SEC, Judge Failla declined to rule today, Terrett said. The judge told both sides to view the lack of decision as a “compliment,” suggesting each side had a viable argument.
