Key points from the SEC vs. Coinbase hearing: The definition of securities may be too broad, and a ruling could be made in a few weeks

Overview: Felix, PANews

On January 17, Coinbase held a court hearing with the U.S. Securities and Exchange Commission (SEC) regarding previous allegations. During the nearly five-hour hearing, U.S. District Judge Katherine Polk Failla questioned both sides on their respective arguments.

In June of last year, the SEC accused Coinbase of illegally operating an unregistered securities exchange, broker, and clearing agency, claiming that its crypto staking services involved the sale and issuance of unregistered securities. Coinbase rebutted these claims, seeking to dismiss the case and accusing the regulatory body of adopting an "enforcement-centric" approach.

Whether Token Trading Constitutes Securities Remains a Core Argument

SEC attorney Patrick Costello argued that the relevant crypto tokens are part of large enterprises (i.e., blockchain networks) and therefore resemble investment contracts. He added that as the network or ecosystem's value grows, the value of each token increases. Consequently, as the case progresses, every asset could be viewed as a security.

In response, Judge Failla expressed concern, stating, "I am really worried… that your definition of securities may be too broad."

Coinbase attorney William Savitt pointed out that Coinbase does not claim that the tokens listed on its website can never be considered securities.

"We do not believe that token trading can never be an investment contract," however, the SEC did not present any allegations in its lawsuit that meet the definition of an investment contract. He also stated that Coinbase agrees with the SEC's view that entering into an investment contract does not require the buyer to sign a formal contract. However, the fact that token buyers read the white paper and other information about the token project does not mean they are purchasing an investment contract.

Savitt also countered the SEC's argument that selling tokens on Coinbase should be viewed as an investment contract simply because the token project may have made certain promises to buyers, who purchase tokens with the hope of price appreciation.

"There must be a statement intended to convey an enforceable commitment. This is the most fundamental condition that can be considered an investment contract."

Savitt indicated that the real difference between blockchain tokens and securities is that whether someone buys stock directly from the issuer or on the secondary market, they receive all the rights conferred by those securities, which is not the case for tokens.

Disagreement on Why Bitcoin Is Not a Security

During the debate, there was a disagreement between the SEC and Coinbase attorneys regarding why Bitcoin is not a security.

In the first part of the hearing, SEC attorney Patrick Costello mentioned Bitcoin, stating that it is not a security because "there is no ecosystem behind Bitcoin," and therefore, those who purchase Bitcoin are not investing in a typical enterprise. Coinbase attorney Savitt responded to this argument in his closing remarks, pointing out that Bitcoin certainly has an ecosystem, just like any other cryptocurrency.

Applicability of the "Major Questions Doctrine" Remains Undetermined

During the hearing, regarding the major questions doctrine cited by Coinbase, Judge Failla acknowledged some hesitation about whether the doctrine applies to this case. She noted that the doctrine rarely becomes part of court rulings, and since Failla has been a judge for ten years, no one has inquired about this doctrine, hence "naturally hesitant."

(Note: In the U.S. Senate, the nuclear option is a procedural maneuver that allows the Senate to overturn the regular rules by a simple majority, rather than the two-thirds supermajority usually required by Senate rules.)

The doctrine stipulates that if an agency wants to make a decision on a matter of significant national importance, it must have explicit authorization from Congress. Coinbase argues that this doctrine applies to the case, and the SEC is attempting to infringe upon Congress's authority and take actions that have "legislative effect." Therefore, Coinbase believes that the doctrine should prevent the SEC's actions until Congress has the opportunity to enact crypto legislation.

Previous Crypto Litigation Rulings May Not Affect This Case

Judge Failla also discussed past rulings in several crypto cases, including the SEC's loss against Ripple and its victory in the Terraform Labs lawsuit.

Judge Failla stated that Judge Jed Rakoff's determination in the Terraform case that crypto asset trading constitutes securities "does not shock me." However, this does not pertain to tokens listed on secondary exchanges. "The facts of Terraform are completely different from this case."

Nevertheless, similar cases brought by the SEC against exchanges like Binance and Kraken may still influence Judge Failla's perspective.

Ruling May Be Issued Within Weeks

While the hearing explored each service in detail, this hearing was specifically arranged for Judge Failla to carefully consider Coinbase's motion to dismiss the case entirely.

Currently, Judge Failla has not announced whether she will dismiss all or part of the lawsuit, and the ruling will be made alongside other recent decisions by other judges in the same court (Judge Failla did not suggest a specific timeline, but it may be issued in writing in the coming weeks).

If the judge denies Coinbase's request to dismiss the case (which is quite likely), the case will enter the discovery phase. After the investigation concludes, both the SEC and Coinbase can file motions for summary judgment.

It is worth noting that at several points during the hearing, the judge praised the amicus brief submitted by the crypto lobbying group DeFi Education Fund, which detailed the technical nature of the Coinbase wallet and Coinbase staking program, arguing that both fall outside the SEC's jurisdiction.