SEC Rebuts Coinbase’s Attempt to Get Appeals Court to Answer Key Crypto Question

I, Coinbase, the leading US crypto exchange, have filed an application with the Second Circuit Court of Appeals, seeking their consideration on whether the Howey Test, a historic Supreme Court benchmark for securities classification, ought to be extended to digital assets. I, along with many others in the industry, hope that it does not.

The SEC stated on Friday that Coinbase has yet to persuasively make the case for this being necessary.

As a researcher investigating the SEC’s accusations against Coinbase, I would rephrase it as follows: The heart of the SEC’s allegation against Coinbase lies in their claim that the platform is functioning as an unregistered broker, exchange, and clearinghouse within U.S. borders. If certain cryptocurrencies are classified as securities based on the Howey Test, then Coinbase would have been required to secure approval from the SEC before permitting customers to trade those specific digital assets.

In their filing with the Securities and Exchange Commission (SEC), Coinbase was attempting to establish a fresh framework for classifying cryptocurrencies within existing securities regulations. However, this approach had previously been dismissed by a district court judge.

I find it unsurprising that Coinbase has yet to propose a clear and consistent argument, according to their recent filing. This is in line with historical precedent set by courts over the past eighty years, which have never demanded post-sale contractual obligations or anything beyond the three factors explicitly outlined by the Supreme Court in the Howey case.

In its filing, Coinbase’s argument for dismissal wasn’t convincingly proven to raise a significant legal issue, according to the filing’s response.

The SEC contends that while Coinbase’s appeal seems to center around a particular legal issue concerning “contractual obligations,” its underlying argument regarding the applicability of the Howey Test to cryptocurrency involves an entirely distinct question.

In an effort to satisfy the “precedential value for multiple cases” requirement, Coinbase shifts its argument away from the question of contractual obligations and towards the application of the Howey test in secondary market transactions for cryptocurrencies.

As a crypto investor, I’m closely following the legal developments between the SEC and Coinbase. The upcoming decision by Judge Katherine Polk Failla is significant, as it could determine whether Coinbase can appeal the case directly to the appellate court if she rules in their favor during this interlocutory appeal phase. This means that her ruling will set the stage for potential further legal proceedings in this high-stakes battle between regulation and innovation within the crypto space.