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SEC vs Coinbase: Exchange Tells Court Why Its Cryptos Aren’t Securities

Last Updated January 18, 2024 12:59 PM
James Morales
Last Updated January 18, 2024 12:59 PM

Key Takeaways

  • Lawyers for the SEC and Coinbase clashed in court on Wednesday, January 16.
  • New York Judge Judge Katherine Polk Failla heard arguments for and against Coinbase’s motion to dismiss the SEC’s lawsuit.
  • Coinbase lawyer William Savitt argued that cryptocurrencies aren’t securities because they don’t grant rights to buyers like stocks or bonds. 

When the Securities and Exchange Commission (SEC) filed a lawsuit accusing Coinbase of selling unregistered securities last year, it set the stage for a courtroom showdown that could have profound implications for the American crypto sector. 

Like other lawsuits in which the SEC is embroiled, the case revolves around the question of what counts as a security. As court proceedings kicked off on Wednesday, January 17, Coinbase’s lawyer William Savitt argued the case should be thrown out, a move that would deal a potentially devastating blow to the regulator’s claim to dominion over the US crypto sector.  

Coinbase Lawyer Compares Crypto to Beanie Babies

During Wednesday’s court session, Savitt made the case  that cryptocurrencies sold on Coinbase shouldn’t be considered securities because they don’t grant rights to buyers in the same way that stocks or bonds do.“It’s the difference between buying Beanie Babies Inc. and buying Beanie Babies,” he told Judge Katherine Polk Failla.

By referencing the quintessential 90s plushies, Savitt appealed to concerns that the SEC’s expansive definition of securities might end up including collectibles within its regulatory perimeter.

Arguing the counterclaim that buying digital assets is more akin to buying Beanie Babies Inc. shares, SEC lawyer Patrick Costello said that when Coinbase users invest in a given crypto, “they are investing into the network behind it.” “One cannot be separated from the other,” he added.

Courts Split on Crypto Securities Debate

In other instances where Judges have been asked to consider whether cryptocurrencies should be considered securities, a mixed bag of decisions only serves to confuse the matter. 

Presiding over the case of SEC vs. Ripple Labs, Judge Annalisa Torres set an important precedent last year when she ruled that XRP sales constituted an investment contract (a legal term used to define securities) under some circumstances, but not others. 

Several months later, when Judge Polk Failla threw out a class action lawsuit against Uniswap, she referred to Ether as a commodity, acknowledging that at least some digital assets fall outside the SEC’s jurisdiction.

More recently, however, Judge Jed Rakoff ruled in favor of the SEC’s claim that Terraform Labs’ tokens should be considered securities.

With the judiciary seemingly split on how to interpret US securities law in the context of digital assets, the Supreme Court may ultimately need to settle the matter.

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