Judge Pins SEC Down Over Crypto Securities

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  • The judge overseeing the Coinbase-SEC case challenged the SEC’s assertion that a digital token issuance satisfies the Howey test, deeming the case “too broad.”
  • Judge Katherine Failla presided over a five-hour hearing on the SEC’s lawsuit against Coinbase for allegedly selling unregistered securities.
  • Coinbase contends that the Howey test isn’t suitable for the crypto sector and advocates for specific regulatory rules for compliance.

The judge presiding over the battle between Coinbase and the US Securities and Exchange Commission (SEC) pushed the agency on its belief that a digital token issuance meets the Howey test, arguing that its case was “too broad.” Judge Katherine Failla presided over a five-hour hearing related to the SEC’s lawsuit against Coinbase, which it accuses of selling securities without a license through its sale of 13 specific cryptocurrencies. Coinbase’s argument is that the Howey test is not appropriate to the sector and that specific rules need to be drawn up to which crypto entities can then work to comply.

SEC Stands by the Howey Test

The SEC sued Coinbase in June last year, to nobody’s surprise, accusing it of the unregistered sale of securities in a case that, if Coinbase loses, could see it hit with a $1 billion fine. Coinbase filed to have the case dismissed in August, with yesterday’s hearing being the product of that filing. The hearing was held for nearly five hours and provided an extensive overview of the key arguments in courts regarding the crypto space, assets, and the SEC’s role in regulating the industry.

The agency contends that when users buy tokens on Coinbase, they are investing in the network behind them, whereas Coinbase’s legal team argued that believing investments might rise in value is insufficient for SEC regulation, emphasizing that the SEC’s authority “stops at the water’s edge.”

Ruling to Come in a Few Weeks

To emphasize their point, Coinbase’s legal team compared cryptocurrencies to 90s collector fad Beanie Babies, stating that the difference between buying cryptocurrencies and securities is like “the difference between buying Beanie Babies Inc. and buying Beanie Babies.”

Judge Failla pressed both teams on their arguments, critically examining the regulator’s case against the crypto exchange and asking the SEC attorneys to explain why it felt the Howey test was appropriate for the nascent sector. In a nod to the arguments made by both parties, she declined to rule from the bench, saying that she would file her judgment in the coming weeks having reexamined the arguments.