Jan 17, 2024 - Business

Coinbase and the SEC argue crypto's key legal question in court

Illustration of the Capitol Building with binary code across the top

Illustration: Sarah Grillo/Axios

Coinbase and the U.S. Securities and Exchange Commission met in court today to argue over throwing out the securities regulator's case against the nation's largest cryptocurrency exchange.

Why it matter: The question at the heart of the case — should the lion's share of crypto assets be considered securities in the United States — is very nearly existential for the crypto industry.

  • While digital assets are so far little used for their utility, their value today is a bet that one day they will.
  • It becomes hard to see how they ever could be used in the world's largest economy, however, if they were treated as securities.

What they're saying: "What we contend is that there are securities transactions that are taking place on Coinbase's platform," Patrick Costello, the SEC's litigation counsel, said at the hearing today. "Which would mean that Coinbase is operating as an unregistered exchange."

Catch up fast: Coinbase's so-called summary judgment motion argues that the SEC's case should be dismissed on the basis of the securities question, contending that the company is careful not to any.

  • The SEC named 13 specific digital assets as examples of securities listed on the exchange. So far, the agency has largely declined to provide clarity on specific assets, except when it has taken action against a crypto startup.

Reality check: The SEC argued today that crypto assets are securities because people buy them with the expectation that the teams that create them will do a good job building around those assets, which will drive up the value of the token.

  • In court today, SEC attorneys made reference to an "ecosystem" of people creating promotions and products around any given digital asset that should drive up their value.

The other side: Attorneys representing Coinbase did not dispute that people buy cryptocurrencies with the hope that their value will go up, but said that's not the point.

  • The point, they argued, is that there's nothing in a digital asset that gives buyers — particularly a buyer on a secondary market, like Coinbase — rights to take action if those issuers do a bad job.
  • Without any right to sue an asset's issuers, counsel argued, there's no investment contract.

The big picture: Judge Katherine Failla noted from the bench that she did not want to rule in such a way that it would open up cause for action for lots of other assets, such as collectibles.

  • To that point, Coinbase's counsel noted that the idea of buying something to make money on it because "an ecosystem" could enhance its value "could be said about very nearly anything." Such as coffee or bitcoin.
  • Beanie Babies came up a lot at the hearing. SEC counsel noted that the government is making no argument that collectibles are within the government's jurisdiction.

Yes, but: The judge noted that what the government asserts doesn't actually matter. What matters, she said, was if some clever attorney could take her ruling and create new headaches for the court.

The intrigue: In a previous case on blockchain assets, Judge Failla noted that the matter was better directed to Congress than the courts.

  • Again, today, she said, "I recognize that I have a lane that I should be staying in."

What's next: The judge will rule on whether or not the larger case proceeds.

  • She declined to do so from the bench, saying that both sides had given her a great deal to think about.
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