Security Definition at the Core of Coinbase v SEC First Scuffle

Coinbase, a U.S based cryptocurrency exchange, and the U.S. Securities and Exchange Commission (SEC) had their first scuffle as New York’s Judge Katherine Polk Failla weighted in on a motion to dismiss the case in which the regulator alleges the exchange was involved in facilitating the trade of unregistered securities. Judge Failla will decide on the subject in the coming weeks.

Coinbase and SEC Face at Court

What might become the most significant case to define the classification of cryptocurrencies as securities finished its first chapter without a clear winner. This Wednesday, Coinbase and the U.S. Securities and Exchange Commission (SEC) met for the first time in court to discuss if the case should be thrown based on the arguments presented by the exchange in a document filed in August.

The SEC charged Coinbase in June on the charges of operating as an unregistered national securities exchange, broker, and clearing agency.

During the hearing, both parties agreed before Judge Katherine Polk Failla that the tokens involved in the lawsuit were not securities by themselves. Nonetheless, the SEC sustains that the ecosystem behind them makes them securities, given there is a group of people working for these to have success. The commission declared that the tokens could not be separated from their ecosystem.

Patrick Costello, SEC assistant chief litigation counsel, stated:

When the value of the network or the ecosystem increases, so does the value of the token.

As in its motion to dismiss, Coinbase insisted that the SEC’s views on what constituted security could not extend to these tokens, given there was no contract signed between the parties selling and acquiring these in secondhand markets. Failla seemed to support this argument, explaining that she was concerned about broadening the definition of a security that could include even collectibles.

Coinbase attorney William Savitt contested the validity of the SEC’s claims. He stressed:

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.

Coinbase CLO Paul Grewal criticized the SEC’s views after the hearing, invoking the Major Questions Doctrine, explaining that the commission “cannot unilaterally expand and redefine its own regulatory ambit” and assigning these responsibilities to lawmakers.

Judge Failla is expected to announce her decision in the coming weeks, announcing she would not decide on this matter from the bench.