US District Judge Grills SEC and Coinbase Lawyers to Decide if Crypto Transactions Constitute Investment Contracts

The presiding judge did not issue a ruling or signal the outcome but a win for Coinbase could be a huge blow to the SEC, which has lost several crypto-related cases.

With the United States Congress having failed to provide clear guidelines for the nascent cryptocurrency market, the key crypto players in the country have turned to the Justice system to seek proper law interpretations. The high demand for crypto assets and the upcoming general elections in the United States has undeniably divided lawmakers. Nonetheless, the cryptocurrency stakeholders have come together through the Fairshake, a federal super PAC registered with the Federal Election Commission, and raised $78 million to ensure leaders who support crypto are elected.

Coinbase and SEC Lawyers Grilled on Crypto Transactions

On Wednesday, January 17, a New York District Judge, Katherine Polk Failla, grilled and listened to all the attorneys from Coinbase Global Inc (NASDAQ: COIN) and the United States Securities and Exchange Commission (SEC). Notable, Judge Failla came to the five-hour court session prepared and armed with a 14-page document on hard questions that both sides were given time to reply to. From the attorneys’ side, it was evident that there is a general consensus that crypto tokens listed on US-based exchanges are not securities. However, the SEC lawyers contested whether crypto token transactions on exchanges constitute investment contracts.

In response, Coinbase’s legal team led by William Savitt argued that all tokens traded on the platform are secondary sales and do not constitute investment contracts under the Howey Test whatsoever. Notably,  Sevitt called the argument a pure question of the law that must be answered to ensure clarity in the nascent industry.

With the Judge expected to take several weeks before issuing a ruling, the crypto market will eagerly be waiting for the decision, which will significantly shape the next phase of web3 adoption in the United States. On one side, if Judge Failla opts to rule in favor of Coinbase, the SEC will be forced to step back in regulating the crypto industry. Furthermore, it has been argued that the SEC has been overstepping its mandate in regulating the crypto industry without the consent of Congress. On the other hand, if the Judge rules in favor of the agency, it could be a huge blow to the crypto industry as more transactions would be subjected to securities laws in the country.

Notably, Judge Failla touched on several cases regarding the crypto industry including the Ripple lawsuit, but did not hint at her possible ruling. According to her, Judge Jed Rakoff’s ruling on Terraform Labs that its crypto assets constitute securities was not entirely a shock. However, she added that the Terraforms Labs’ case is very different as the tokens in question are different.


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