Coinbase Celebrates Legal Win

Coinbase has scored an important, though interim, victory in its ongoing legal battle with the SEC. This win not only reflects the exchange’s legal efforts but also highlights the inconsistencies in the SEC’s approach to classifying cryptocurrencies as securities.

Coinbase and the SEC have been locked in a legal standoff for an extended period. On June 6, 2023, the SEC filed a lawsuit against Coinbase Global Inc., alleging that its staking program violated the Securities Act of 1933. The regulator argued that the program constituted an investment contract, asserting that all traded and staked crypto assets qualify as securities under the Howey Test.

On January 7, Judge Katherine Failla of the U.S. District Court for the Southern District of New York granted Coinbase’s motion for an interlocutory appeal, originally filed in March 2024. This decision halts all ongoing proceedings in the case until the Second Circuit Court of Appeals issues its ruling.

In approving the appeal, Judge Failla acknowledged the need to reconsider her interpretation of the term “investment contract” under the Howey Test. While the test was designed for traditional financial instruments, applying it to cryptocurrencies has proven complex and contentious.

Judge Failla also pointed to conflicting rulings in similar SEC cases involving Terraform Labs and Ripple Labs. Different judges have reached inconsistent conclusions about what qualifies as a “security” in the context of cryptocurrencies. The Ripple case stands out, with the court finding that XRP is not a security when sold to retail investors on exchanges but may be classified as a security in sales to institutional investors. 

Related: Ripple vs SEC: Is This the Final Chapter?

Judge Katherine Failla pointed out that “conflicting decisions on an important legal issue necessitate the Second Circuit’s guidance.” In doing so, the court acknowledged that the SEC’s inconsistent approach and lack of clear criteria for classifying crypto assets have created a situation necessitating intervention from a higher authority.

Judge Katherine Failla. Source: law.com

Judge Katherine Failla. Source: law.com

The decision to allow an interlocutory appeal sends a strong message that the SEC’s approach to cryptocurrency regulation needs to be reevaluated. The inconsistencies and contradictions in defining “securities” within the context of crypto assets ultimately helped Coinbase secure this small but pivotal victory. The outcome of the appeal could have a major impact on the future of cryptocurrency regulation in the United States.

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