Coinbase aims to peel back the bandage on the legal impasse at the center of the crypto industry's battle with the U.S. Securities and Exchange Commission (SEC), filing a preliminary appeal on Friday asking a higher federal court to delve into the nitty-gritty. The regulator's stance on digital assets comes even as a broader SEC case makes its way through the judicial system.
The U.S. exchanges filed a so-called interlocutory appeal, raising narrow legal differences and requesting that the U.S. Court of Appeals for the Second Circuit consider the matter independently. A federal judge recently denied Coinbase's efforts to have the SEC lawsuit against Coinbase thrown out before trial, but Coinbase is now asking the court that the SEC treats investment contracts when they are not related to digital asset transactions. We are formally asking them to consider whether this is possible. A legal obligation from the original issuer of an asset.
Coinbase argued in its appeal that the SEC's use of the so-called Howey test for cryptocurrency assets obscures its understanding of what constitutes a security.
“Applying Howey to digital asset trading raises difficult questions,” Coinbase argued. “The divergent responses from members of Congress, senators, and regulators demonstrate the difficulty of this issue, and the divergent judicial outcomes illustrate the point.”
Such appeals usually prove to be hopeless, as the SEC found when it filed similar claims in its own case against Ripple and was dismissed. But if the appeals process is successful, it could move the industry one step closer to a U.S. Supreme Court decision that could ultimately resolve the issue for good.
When asked for comment on the attempted appeal, an SEC spokesperson said, “Any response will be disclosed in public filings with the court.”
Investment contracts are securities regulated by the SEC, so if a cryptocurrency transaction qualifies, it falls under the jurisdiction of the SEC and must be properly registered under the law. While regulators have argued before lawmakers and courts that the vast majority of digital assets are securities, Coinbase and other industry participants have argued that once an asset hits the secondary market, it has no connection to the company that issued it. They argue that once the tokens run out, the tokens will reach their limit. SEC Legal Scope. Answering this debate will be fundamental for the US crypto sector.
Judge Catherine Polk Failla of the Southern District of New York ruled last month that the SEC had sufficiently demonstrated the legal premises in its complaint against Coinbase, and that the court would proceed with most of the case. Coinbase's new appeal of parts of that ruling must be accepted by Judge Feira and the Second Circuit in order to move forward. If they take it up, the rest of the case would be held up in Filer's court while regulators and the company move toward trial.
The Coinbase case is considered one of the defining legal battles that could determine the fate of the industry in the United States. So far, the SEC has faced some big losses (such as the one against Ripple) and some big gains (such as the case against Terraform Labs, and the insider trading case related to Coinbase).
Updated (April 13, 2024, 00:20 UTC): Add additional details.
Updated (April 13, 2024, 02:28 UTC): Added response from SEC.
