Judge puts SEC lawsuit against Coinbase on hold

A federal judge has allowed Coinbase to file an interlocutory challenge to the Second Circuit Court of Appeals in its ongoing case with the US Securities and Exchange Commission (SEC), citing conflicting rulings on the legal status of the crypto

Judge Katherine Failla accepted the exchange’s appeal of her March 2024 order denying the company’s motion for judgment.

A huge legal victory for Coinbase

Coinbase Chief Legal Officer Paul Grewal acknowledged the development in a January 7 post:

“Over the SEC’s strong objection, Judge Failla has granted our motion for leave to file an interlocutory appeal and has stayed the litigation in district court.”

Fox Business reporter Eleanor Terrett described the decision as “a huge legal victory for Coinbase,” explaining that the judge had granted a rare interlocutory appeal, allowing the exchange to challenge the SEC’s claims in the Court of Appeals for the Second Circuit.

The financial watchdog initially filed its complaint against Coinbase on June 6, 2023, alleging that the company failed to register as a broker, national stock exchange or clearing agency while performing all three functions.

The suit also alleged that it had violated securities laws by offering tokens such as SOL, ADA and MATIC, which it argued are securities under the Howey test.

In response, the exchange filed a motion in June 2023 to dismiss the suit, arguing that the tokens in question lack the contractual obligations of securities and that their operations fall outside the SEC’s jurisdiction.

In response, the court granted and partially denied that motion in March 2024, prompting her to seek certification of an interlocutory appeal.

Contradictory opinions

In her Jan. 7 ruling, Judge Failla certified the order on appeal, stating that it involved a “question of controlling law” over the application of the Howey test to crypto assets, an issue that involves several conflicting opinions. He noted that resolving this would help conclude the SEC’s enforcement action against Coinbase.

He also highlighted unresolved issues in other high-profile cases involving the regulator, such as its actions against Ripple Labs. He explained that Ripple’s decision drew distinctions between token sales to institutional investors and retail buyers, an argument that Coinbase has urged the courts to adopt.

He also highlighted Coinbase’s argument that commodities have inherent value independent of their ecosystems. However, Failla rejected Howey’s narrower interpretation of the platform, stressing that the absence of formal contractual obligations does not exempt crypto assets from being securities if buyers reasonably expect to benefit from the efforts of others.

“Indeed, there is substantial ground for discussion as to how Howey applies to crypto assets and the role of the surrounding digital ecosystem in this analysis,” the document read.

Failla acknowledged the uncertain legal landscape, writing that applying the Howey test to digital ecosystems is a “difficult issue of first impression for the Second Circuit.”

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