Judge’s Comments on SEC’s Lawsuit Against Coinbase

Judge’s Comments on SEC’s Lawsuit Against Coinbase

Between Coinbase, Custodia, Roman Storm and Sam Bankman-Fried, there was a plot news last week. Let’s go.

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The narrator

Both Coinbase and Custodia lost early and preliminary court fights. THE Loss of Coinbase was more or less expected – companies rarely win much on a motion for judgment at such an early stage – but nevertheless remains quite enlightening.

Why is this important

At some point, cases involving the United States Securities and Exchange Commission will go to the courts of appeals and perhaps even to the United States Supreme Court, if not settled first. In the meantime, these district court rulings shed light on how judges view the crypto industry.

Break it down

Judge Katherine Polk Failla spoke out primarily against Coinbase After a first motion for judgmentrejecting the SEC’s assertions regarding Coinbase Wallet but leaving a substantial portion of the complaint intact.

The usual caveats apply: This is an initial motion and the judge was required to accept the facts alleged in the SEC’s complaint. We don’t usually see cases dismissed entirely at this point anyway, so Coinbase’s chances of success were also pretty slim.

That said, the judge laid out a pretty clear road map in her 84-page ruling, repeating common industry arguments about whether crypto meets the standards of the major questions doctrine (no), what what does a cryptocurrency ecosystem mean in terms of this type of dispute (we will return to this later), whether there must be a written contract to satisfy the terms of an “investment contract” as defined in SEC vs. Howey (no) and whether any of the assets the SEC named in its complaint are securities (that’s plausible). In his ruling, the judge rejected some of Coinbase’s arguments about how cryptocurrencies could be treated in the United States.

Regarding the big questions doctrine, Justice Failla agree with Judge Jed Rakoff, which resides in the same district, ruled that the crypto industry does not meet the Supreme Court’s standards for what could be a major industry. In doing so, she became the latest justice to rule that the SEC is fully capable of pursuing enforcement actions and regulating crypto, and that it does not need a congressional mandate. Failla also agreed with Rakoff on other parts of his order.

“Contrary to defendants’ assertions, neither Howey nor his progeny have contended that the expected profits in a joint enterprise are limited only to shares in the revenues, profits, or assets of a business,” the judge wrote, citing also another judgment of the Supreme Court. decision.

Citing Rakoff again, Failla said a joint venture would exist if a token issuer used proceeds from a token sale “to further develop” the “broader token” ecosystem.

Justice Failla explicitly rejected the argument that a formal contract is required for an “investment contract” to exist, thus opposing another argument that is quite common in this type of case.

“To begin with, there is no need for a formal contract between the parties to the transaction for an investment contract to exist under Howey,” she wrote. “Indeed, courts in this circuit have consistently declined invitations from cryptocurrency industry defendants to insert a ‘contractual’ requirement into Howey’s analysis.”

Arguments that cryptocurrencies are akin to Beanie Babies or baseball cards fell flat before the judge, as did the suggestion that the SEC could take over “essentially all investment activity” if a Formal contract is not necessary.

The judge appears to suggest that all crypto is part of a joint enterprise because a token does not exist as an individual product.

“Unlike the transaction of goods or collectibles (including the Beanie Babies mentioned during the pleading…), which can be consumed or used independently, a crypto-asset is necessarily mixed with its digital network – a network without which no token can exist. ,” she wrote.

The judge also considered whether Coinbase listed any securities, finding that the regulator had plausibly alleged that with at least two of them, solana (SOL) and chiliz (CHZ), holders could “reasonably …expect to profit” from Solana Labs. or the efforts of the Chiliz team around their respective tokens.

“The parties do not dispute that, in order to assert its claims, the SEC must simply establish that at least one of these 13 cryptoassets is being offered and sold as collateral, and that Coinbase has carried out transactions relating thereto, of such that the transaction in the sense that Crypto-Asset would amount to operating an unregistered exchange, broker-dealer or clearing agency,” the order states.

The case will now move to the discovery phase, with both sides facing an April deadline to work together on a plan to manage the case. Presumably, the affair will escalate afterward, as the parties argue over who gets what and exchange documents.

Judge’s Comments on SEC’s Lawsuit Against Coinbase

This week

  • (The edge) The Verge’s Liz Lopatto delved into the downfall of Vice in this carefully reported piece that also contains some excellent lessons about journalism.

  • (The edge) Liz was also present at Sam Bankman-Fried’s sentencing hearing last week.

  • (The Wall Street Journal) Large language model companies need more information – “high-quality text data,” in the words of Deepa Seetharaman’s article – than they have to continue developing their artificial intelligence tools.

If you have any ideas or questions about what I should discuss next week or any other comments you would like to share, please feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde.

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See you next week !

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