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Coinbase Crypto Exchange and US SEC stand in US court over digital assets as securities

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A federal judge in Manhattan held a grilling Wednesday CoinBase and the US securities regulator over their differing views on whether and when digital assets are securities, in a case closely monitored by cryptocurrency industry.

Coinbase asked the court to reject the proposal Securities and Exchange Commission lawsuit involving the largest in the United States cryptocurrency the exchange is breaking its rules.

Judge Katherine Polk Failla heard arguments from both sides on Wednesday, focusing her questions on the legal precedent defining securities and the attributes of several crypto tokens traded on Coinbase and elsewhere that the regulator has deemed investment contracts.

Failla did not decide the matter from the bench, noting that he was still weighing some questions after the hearing that lasted more than four hours.

The judge’s ruling is likely to have implications for digital assets by helping to clarify the SEC’s jurisdiction over the sector.

The case is part of a series of attacks the SEC has brought against the cryptocurrency industry. The agency initially focused on companies that sell digital tokens, but under the leadership of President Gary Gensler it has targeted companies that offer trading platforms and clearing activities and act as broker-dealers.

The SEC sued Coinbase in June, saying the company facilitated the trading of at least 13 crypto tokens, including Solana, Cardano and Polygon, which it said should have been registered as securities.

The Securities Act of 1933 outlined a definition of the term “security,” but many experts rely on a U.S. Supreme Court case to determine whether an investment product constitutes a security. A key test is whether people commit to investing in a joint venture with the expectation of profit.

Coinbase, the world’s largest publicly traded cryptocurrency exchange, has argued that cryptocurrencies, unlike stocks and bonds, do not meet the definition of an investment contract, a position held by the vast majority of the cryptocurrency industry.

SEC lawyers argued that the securities differ from purchases of collectibles such as baseball cards or even Beanie Babies, referencing a 1990s trend in which Americans bought dolls with the expectation that they would increase in value.

Patrick Costello, the SEC’s assistant chief counsel, argued that the crypto tokens at the center of the case support a larger “enterprise,” making them similar to an investment contract.

“When the value of the network or ecosystem increases, the value of the (associated) token also increases,” he said.

However, Failla told SEC lawyers that she was “concerned” that the agency was asking her to “broaden the definition of what constitutes a security.”

The SEC said buyers of digital assets, including on secondary markets like Coinbase’s platform, were buying the tokens as investments similar to stocks or bonds.

But Coinbase lawyers disagree, pointing out that buyers of such tokens do not sign contracts that entitle them to the proceeds of a joint venture.

“I’ll tell you this: I think she would have been very surprised to find out that an investment contract had nothing to do with a contract,” said William Savitt, a lawyer for Coinbase.

The judge appeared dismissive of Coinbase’s argument that the lawsuit involves the so-called important questions doctrine. This legal principle is based on a Supreme Court ruling that federal agencies cannot regulate without specific authorization from Congress.

The SEC in its lawsuit also took aim at Coinbase’s “staking” program, in which it pools resources to verify activity on blockchain networks and takes fees, in exchange for “rewards” for customers. The SEC said the program would have to be registered with the agency.

© Thomson Reuters 2024

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