Key Takeaways
- The ruling allows Coinbase to seek clarity on whether an investment contract requires the existence of an actual agreement.
- Judge Failla emphasized that this case presents a “controlling question of law” concerning the application of the Howey test to crypto-assets
The United States District Court for the Southern District of New York has granted Coinbase permission to pursue an interlocutory appeal in its ongoing legal dispute with the U.S. Securities and Exchange Commission (SEC).
The January 7 ruling by Judge Katherine Polk Failla halts the case’s proceedings temporarily, allowing Coinbase to seek clarity on whether an investment contract requires the existence of an actual agreement. The appeal will now proceed to the Second Circuit Court of Appeals.
Interlocutory appeals are relatively rare and typically signal that the trial court sees the necessity for higher judicial review of critical legal questions. Judge Failla emphasized that this case presents a “controlling question of law” concerning the application of the Howey test to crypto-assets—a test used to determine what qualifies as a security.
She also noted the existence of “conflicting conclusions” in other SEC cases, such as those involving Ripple Labs and Terraform Labs, further underscoring the need for guidance from the appellate court. “These conflicting decisions on an important legal issue necessitate the Second Circuit’s guidance,” she remarked in her ruling.
The SEC initiated its lawsuit against Coinbase in June 2023, alleging that the exchange had been operating as an unregistered securities exchange, broker, and clearing agency since 2019. The regulator contends that certain transactions facilitated by Coinbase, including those related to its staking program and crypto offerings, qualify as investment contracts and should fall under its oversight.
Central to the SEC’s argument is that these transactions meet the criteria of the Howey test, which evaluates whether a financial transaction involves an investment of money in a common enterprise with the expectation of profits derived from the efforts of others.
Coinbase has challenged this interpretation, asserting that crypto tokens traded on its platform do not meet the requirements of the Howey test because token issuers do not have direct obligations to buyers.
Paul Grewal, Coinbase’s Chief Legal Officer, welcomed the court’s decision, stating on X (formerly Twitter), “We appreciate the Court’s careful consideration in granting this appeal.” He also used a sports metaphor to explain the situation, likening it to a referee pausing a game to review a critical play.
Legal experts have highlighted the broader implications of this decision. Jeremy Hogan, a partner at Hogan & Hogan, pointed out that interlocutory appeals are uncommon, indicating that the trial judge acknowledges the importance of appellate review.
Similarly, Jake Chervinsky, Chief Legal Officer at Variant Fund, described the appeal as a major development, suggesting that the Second Circuit’s ruling could provide much-needed clarity on how securities laws apply to transactions in secondary crypto markets.
Many in the crypto space have often criticized the SEC for relying on enforcement actions rather than issuing clear rules. Coinbase has been vocal in its opposition, arguing that the SEC’s actions stifle innovation and create uncertainty.
