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Coinbase Case Judge Asks If SEC Is ‘Sweeping Too Broadly’ as She Weighs Dismissal

Coinbase Wins Supreme Court's Favor in Arbitration Dispute

In a much anticipated legal showdown, attorneys for the Securities and Exchange Commission (SEC) and Coinbase squared off in a Manhattan courtroom on Wednesday, arguing over whether the SEC’s lawsuit against Coinbase should be dismissed.  

The federal regulator accused the crypto exchange last June of operating illegally, in violation of securities laws.

Over the course of a nearly five-hour hearing, U.S. District Judge Katherine Polk Failla prodded both sides on the merits of their respective arguments—and seemed particularly willing to question the SEC’s claim that existing securities laws can so easily apply to the novel cryptocurrency industry.

“It is a real fear that I have, that your argument is just sweeping too broadly,” Judge Failla warned an SEC attorney as she laid out a hypothetical scenario in which a ruling in the SEC’s favor might open the door to a Beanie Babies class action lawsuit. “How [do] I know that your test isn’t going to implicate either collectibles or commodities?”

In a particularly lively exchange, an SEC attorney attempted to convince the judge that she should pay little heed to a brief in the case filed in support of Coinbase by Senator Cynthia Lummis (R-WY), a noted crypto advocate. Judge Failla seemed unconvinced by the warning and even implied that the SEC’s attorney was not referencing the politician with proper deference.

“Okay, she’s not just a random senator,” the judge replied from the bench to SEC counsel. “She’s someone deeply involved in the space, and [who] is herself a co-sponsor of legislation to implement a [regulatory] structure that she says is not found in the Howey Test.” 

The comment was a reference to Senator Lummis’ proposed crypto legislation, which would create a specialized regulatory framework for the digital assets industry and strip the SEC of its authority to sue most crypto projects and exchanges—a power the agency claims it receives from a 1946 Supreme Court case.

Judge Failla appeared sympathetic to Lummis’ desire to create a specialized crypto regulatory framework, and the senator’s argument that the SEC’s Howey Test might not apply to the crypto industry. 

In response to an SEC attorney who argued that crypto-specific regulation could set a bad precedent for securities regulation, the judge said: “They’re not saying they’re overruling or repealing [the Howey Test]. They’re saying: ‘We’ve had a great run. We’ve had 90 years during which these securities laws have been able to cover all manner of instruments. And now we’ve got something different.”

The SEC’s case against Coinbase alleges that four components of the company’s services—its digital asset exchange, its services for institutional investors, its facilitation of crypto staking, and the Coinbase Wallet—each constitute illegal securities violations. 

While Wednesday’s hearing delved into each of those services at length, the occasion was specifically scheduled to allow Judge Failla to mull over Coinbase’s motion to dismiss the case in its entirety. 

The judge did not announce any decision today as to whether she will dismiss all or part of the lawsuit. That ruling will likely arrive in written form at some point in the coming weeks. 

But Judge Failla did appear particularly compelled by arguments that—at the very least—charges related to Coinbase’s facilitation of crypto staking, and the Coinbase Wallet, should be dismissed. 

At multiple points in the hearing, the judge commended an amicus brief in the case filed by the DeFi Education Fund, a crypto lobbying group, which detailed the technical nature of the Coinbase Wallet and Coinbase’s staking programs, and argued that neither fell under the SEC’s jurisdiction. 

“The DeFi people have what I think is a really fine amicus brief, explaining to me what the wallet really is, and what staking really is,” Judge Failla told an SEC attorney. “And that actually, in some respects, makes more sense to me than the Commission’s description of it in the complaint.”

Nearly an hour later, the judge brought up the DeFi Education Fund’s brief once again, complimenting it as “very interesting.”

Edited by Ryan Ozawa.

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Source: https://decrypt.co/213288/coinbase-case-judge-asks-if-sec-is-sweeping-too-broadly-as-she-weighs-dismissal

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