Oral arguments kicked off in Manhattan Wednesday regarding the highly anticipated case against Coinbase brought forward by the United States Securities and Exchange Commission (SEC).
“The SEC has violated due process”
The federal agency originally filed the lawsuit against Coinbase in June 2023, alleging that the cryptocurrency exchange failed to register as a securities exchange under the logic that several of the cryptocurrencies sold on the platform were classified as such.
However, Coinbase pushed back last August by claiming that none of the tokens in question classified securities at all.
“The SEC has violated due process, abused its discretion, and abandoned its own earlier interpretations of the securities laws,” Coinbase wrote in their brief. “But there is a more fundamental problem with its case—one the Chair recognized two years ago and that entitles Coinbase to judgment on the pleadings now: The subject matter falls outside the agency’s delegated authority.”
Passing the test?
Previously, Senator Cynthia Lummis (R-WY) filed an amicus curiae brief in support of Coinbase, stating that the SEC is attempting “to shoehorn an entire new class of assets into the existing definition of a “security.”
Moreover, Lummis claimed the federal agency’s push to label crypto-assets as securities “exceeds the SEC’s authority, encroaches on Congress’s lawmaking, and contravenes the separation of powers.”
When Judge Katherine Polk Failla, who is presiding over the case, asked lawyers for the SEC why she should not listen to Senator Lummis in dismissing the lawsuit, representation for the SEC claimed she would be overriding over ninety years of modern securities law, citing the “Howey test.”
Based on the 1946 Supreme Court case SEC v. Howey, which defines any security as an investment contract. According to Embroker, a transaction is classified as an investment contract and passes the “Howey test” when it consists of an investment of money in a common enterprise with a reasonable expectation of profit derived from the investment of others.
“It’s not we who are unwilling to faithfully apply the case law; it’s the Commission,” said a lawyer for Coinbase. “They are trying to stuff these transactions (into Howey) when they don’t belong there.”
A decision is TBA
Following over four hours of oral arguments, Judge Failla was unable to successfully make a decision on the case as of Wednesday afternoon.
“I worry that I would be doing exactly the thing you’re alleging the Commission is doing here, which is to take power that I don’t have to stop activity I shouldn’t be stopping,” Judge Failla said.
“The answer may be that I’m just out of luck until Congress acts,” Judge Failla stated.
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