The SEC accuses the crypto exchange of violating regulations by selling unregistered securities.
On Wednesday, a federal judge in Manhattan questioned Coinbase and the US securities regulator about their contrasting perspectives on the classification of digital assets as securities. The cryptocurrency industry closely monitors this case.
Coinbase contended that cryptocurrencies shouldn’t be labeled as securities, drawing a comparison to Beanie Babies. The argument emphasized that digital coins resemble collectibles rather than ownership stakes in a company.
Coinbase lawyer William Savitt stated, “It’s the difference between buying Beanie Babies Inc and buying Beanie Babies.
Coinbase has requested the court to dismiss the Securities and Exchange Commission’s lawsuit, which accuses the largest US crypto exchange of violating regulations and selling unregistered securities.
The SEC countered the claim, asserting that acquiring a token equates to investing in the issuer’s enterprise. According to the SEC, the crypto tokens central to the case represent a broader “enterprise,” resembling an investment contract.
SEC lawyer Patrick Costello emphasized, “When they buy this token, they are investing into the network behind it. One cannot be separated from the other. When the value of the network or the ecosystem increases, so does the value of the [associated] token.”
In a hearing on Wednesday, Judge Katherine Polk Failla considered arguments from both parties, directing her inquiries towards the legal precedent defining securities and the characteristics of various crypto tokens traded on platforms like Coinbase. Failla did not issue an immediate decision, stating she was still deliberating on some questions following the more than four-hour hearing.
In June, the SEC filed a lawsuit against Coinbase, alleging that the platform facilitated the trading of at least 13 crypto tokens, including Solana, Cardano, and Polygon, which the SEC claimed should have been registered as securities.
While the Securities Act of 1933 provides a definition for the term “security,” many experts refer to a US Supreme Court case to determine if an investment product qualifies as a security. A crucial criterion is whether individuals are entering into contracts to invest in a common enterprise with the expectation of profit.
Coinbase has argued that crypto assets, unlike traditional stocks and bonds, do not meet the definition of an investment contract—a stance shared by the majority of the crypto industry.
SEC lawyers contended that securities are distinct from purchases of collectibles such as baseball cards and Beanie Babies, referring to the 1990s trend when Americans bought these stuffed animals with the anticipation of an increase in value.
Patrick Costello, an SEC lawyer, stated, “When you are buying a collectible, let’s say a baseball card or a figurine of some kind, you’re just buying the item. You are buying a thing.”
However, Judge Failla expressed concern to SEC attorneys, noting that the agency seemed to be asking her to “broaden the definition of what constitutes a security.”
The SEC argued that buyers of digital assets, even on secondary markets like Coinbase’s platform, were acquiring the tokens as investments similar to stock shares or bonds.
However, Coinbase’s legal team held a contrary view, emphasizing that purchasers of such tokens did not enter into contracts granting them entitlement to proceeds from a common enterprise.
“I’ll tell you this: I think there would have been a lot of surprise to find that an investment contract didn’t have anything to do with a contract,” stated William Savitt, a lawyer representing Coinbase.
The judge seemed unresponsive to Coinbase’s assertion that the lawsuit implicates the so-called major questions doctrine. This legal principle is derived from a Supreme Court ruling stating that federal agencies cannot regulate without specific congressional authorization.
The SEC, in its legal action, also targeted Coinbase’s “staking” program, where it pools assets to validate activity on blockchain networks, takes commissions, and provides “rewards” to customers. The SEC contended that this program should have been registered with the agency.
