Coinbase’s 5-Hour SEC Face-Off on Stocks and Terraform Labs

The Securities and Exchange Commission (SEC) and cryptocurrency exchange Coinbase faced off in a marathon 5-hour court hearing on January 18th. At stake is whether popular crypto tokens qualify as securities requiring SEC oversight.

Judge Katherine Polk Failla repeatedly pressed the SEC to justify its expansive view of what constitutes a security token under the Howey legal test. Meanwhile, Coinbase contends the regulator is drastically overreaching to bring crypto under its regulatory purview.

Applying the Howey Test

Much of the high-profile debate centered around interpretations of the Howey test, which defines investment contracts that fall under SEC jurisdiction.

The SEC claims the ecosystem and developer community behind crypto tokens represents a “common enterprise” under Howey. Therefore, token buyers purchase shares in that enterprise and its potential profits.

Coinbase fired back that the SEC misapplied Howey since crypto investors purchase tokens for varying reasons beyond profit, including their utility or to support innovative technology.

Citing Recent Crypto Rulings

To justify its stance, the SEC pointed to the recent court loss by Terraform Labs, which ruled that LUNA tokens were unregistered securities. However, Coinbase highlighted that the Terraform case did not involve secondary resales, unlike on crypto exchanges.

The regulator also invoked the Ripple ruling that found some XRP sales to institutional investors qualified as securities. Yet Ripple also won partial summary judgment, finding that secondary XRP trades on exchanges are not securities since traders do not share profit.

Coinbase claims the same logic should apply to its platform, enabling arms-length token transactions without investment-sharing arrangements.

Coinbase’s “New” Howey Test

A core disagreement is whether Coinbase devised its watered-down take on the Howey investment contract standard to avoid registering tokens.

“We think they’re making up a new test,” claimed the SEC legal team. They argued there is ample precedent and judicial guidance to regulate crypto tokens as securities in cases like Ripple and Terraform.

But Coinbase’s counsel dismissed this perspective as “just wrong” and an attempt to lump together completely different fact patterns under one flawed legal theory.

The Ongoing Court Battle

The hearing occurred as part of Coinbase’s motion to dismiss the SEC’s June 2022 lawsuit alleging the exchange listed 13 digital tokens as unregistered securities.

The regulator claims that offerings of tokens like Solana, Cardano, Polygon, and others violated federal securities laws. It aims to see these assets registered with the SEC or stripped from the Coinbase platform.

A ruling dismissing the suit would severely hinder the SEC’s crypto oversight powers. However, advancing the case would reinforce the body’s jurisdiction over token trading.

The days-long debate highlighted the complex, polarizing legal arguments around crypto regulation across US courts. With key terms like investment contracts and common enterprise under dispute, expect lengthy appeals no matter the final verdict.

Conclusion

January 18th’s marathon courtroom session underlined the thorny legal complexities around deeming crypto tokens securities. Core arguments swirled around critiques of the SEC overextending the Howey test versus Coinbase attempting to duck regulation.

For now, the fiercely contested lawsuit will continue unfolding. However, a final decision either way could set an influential precedent on the SEC’s ability to govern digital asset markets.

Steefan George is a crypto and blockchain enthusiast, with a remarkable grasp on market and technology. Having a graduate degree in computer science and an MBA in BFSI, he is an excellent technology writer at The Coin Republic. He is passionate about getting a billion of the human population onto Web3. His principle is to write like “explaining to a 6-year old”, so that a layman can learn the potential of, and get benefitted from this revolutionary technology.