Key Takeaways
- SEC argues that certain cryptocurrencies listed on Coinbase qualify as investment contracts under the Howey Test
- SEC states Coinbase’s interpretation of the Howey Test is narrow
The U.S. Securities and Exchange Commission (SEC) is escalating its legal battle with Coinbase Global, as it seeks to deny the exchange’s motion to dismiss the SEC’s lawsuit against the company.
The SEC’s move follows a recent court ruling in the case of cryptocurrency developer Ripple Labs Inc., which found that Ripple did not violate federal securities laws by selling its XRP token on public exchanges. However, the SEC argues that Coinbase’s reliance on this ruling is misguided and highlights “fatal flaws” in its defense.
In its filing made on October 3rd in a New York District Court, the SEC firmly pushed back against Coinbase’s claims in its dismissal motion. The regulatory agency reiterated its stance that some of the cryptocurrencies listed on Coinbase’s platform qualify as investment contracts under the Howey Test, making them subject to SEC registration.
“The assets we list on our platform are not securities and are not within the SEC’s jurisdiction,” said Coinbase legal chief Paul Grewal in response to the SEC’s arguments. Grewal expressed concern that the SEC’s stance would imply that everyday items like Pokémon cards, stamps, and Swiftie bracelets could be considered securities.
The SEC initially filed a lawsuit against Coinbase in June, alleging that the exchange failed to register as a securities exchange with the regulatory authority. Coinbase, in its defense, sought to have the case dismissed by arguing that the trading of cryptocurrencies on its platform is not equivalent to investment contracts.
However, the SEC countered this argument, emphasizing that the crux of the matter is the interpretation of the Howey Test, a legal framework used to determine whether an asset qualifies as a security. Coinbase’s interpretation is narrower, while the SEC insists on a more flexible and broad interpretation when classifying assets as securities.
Furthermore, the SEC asserted that Coinbase was well aware that cryptocurrencies it offered could be deemed securities if they met the criteria set out in the Howey Test. The SEC pointed to Coinbase’s own filings with the regulatory authority as evidence of this awareness.
Coinbase’s attempt to invoke the “major questions doctrine,” claiming that the SEC lacked jurisdiction over the crypto market without explicit congressional authorization, was also challenged by the SEC. The regulatory agency argued that it had not assumed any new powers beyond what the federal securities laws already authorized it to do.
