SEC v. Coinbase Hearing: Judge Questions Broad Definition of Securities, Ruling Expected Within Weeks
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SEC v. Coinbase Hearing: Judge Questions Broad Definition of Securities, Ruling Expected Within Weeks
The ruling in this case will depend on whether the trading of any of the dozen or so cryptocurrency tokens should be classified as an unregistered security.
Navigating Web3 tides with focused insightsBy Felix, PANews
On January 17, Coinbase and the U.S. Securities and Exchange Commission (SEC) held a court hearing regarding prior allegations. During the nearly five-hour session, U.S. District Judge Katherine Polk Failla of the Southern District of New York questioned both parties on their respective arguments.
Last June, the SEC accused Coinbase of illegally operating unregistered securities exchanges, broker-dealers, and clearing agencies, and alleged its crypto staking services involved unregistered offers and sales of securities. Coinbase has contested these claims, seeking dismissal of the case, and criticized the regulator for pursuing what it calls “enforcement by enforcement.”
Whether token trading constitutes securities remains central dispute
SEC attorney Patrick Costello argued that relevant crypto tokens are part of large enterprises—namely blockchain networks—and thus resemble investment contracts. He added that as the value of the network or ecosystem grows, so does the value of each token. By extension, under this logic, nearly every asset could eventually be classified as a security.
Judge Failla expressed concern, stating, "I really worry... that the definition of a security you're advancing might be overly broad."
Coinbase attorney William Savitt clarified that Coinbase does not claim tokens listed on its platform can never be deemed securities.
"We don't believe token trading can never amount to an investment contract," Savitt said. However, he emphasized that the SEC failed to allege any facts in its complaint satisfying the legal definition of an investment contract. He acknowledged the SEC’s position that a formal written agreement is not required for an investment contract to exist. Yet, the fact that token buyers read whitepapers or other project-related materials does not mean they are purchasing an investment contract.
Savitt also rejected the SEC's argument that selling tokens on Coinbase should be considered offering investment contracts merely because token projects may have made certain promises, and buyers expect price appreciation.
"There must be a statement intended to convey an enforceable promise. That is the indispensable minimum condition for something to be considered an investment contract."
Savitt further highlighted a key distinction between blockchain tokens and securities: regardless of whether someone buys shares directly from an issuer or on a secondary market, shareholders receive all rights granted by the security. This is not the case with tokens.
Disagreement over why Bitcoin is not a security
During the hearing, disagreement emerged between SEC and Coinbase attorneys over why Bitcoin is not a security.
In the first part of the hearing, SEC attorney Patrick Costello mentioned Bitcoin, noting it is not a security because "there is no ecosystem behind Bitcoin," meaning purchasers are not investing in a common enterprise. In his closing remarks, Coinbase’s Savitt countered this view, arguing that Bitcoin clearly has an ecosystem, just like any other cryptocurrency.
Uncertainty over applicability of the 'major questions doctrine'
Regarding Coinbase’s invocation of the major questions doctrine, Judge Failla acknowledged some hesitation about whether this so-called “nuclear option” applies in the case. She noted the doctrine rarely features in judicial decisions, and during her 10 years on the bench, no one had previously raised it—making her “naturally hesitant.”
(Note: In the U.S. Senate, the nuclear option refers to a parliamentary procedure allowing a simple majority to override standing rules instead of the two-thirds supermajority normally required.)
The doctrine holds that if an agency seeks to decide issues of vast national significance, it must have clear congressional authorization. Coinbase argues this principle applies here, claiming the SEC is attempting to exercise legislative power without such authority—engaging in actions with “the force of law.” Therefore, Coinbase contends, the doctrine should block the SEC’s enforcement action until Congress has the opportunity to pass specific crypto legislation.
Prior crypto rulings may not impact this case
Judge Failla also discussed past rulings in several crypto cases, including the SEC’s loss against Ripple and its partial victory in the Terraform Labs litigation.
She said Judge Jed Rakoff’s determination in the Terraform case that crypto asset sales constituted securities was “not surprising to me,” but stressed those findings did not involve tokens being listed on secondary exchanges. “The facts in Terraform are completely different from this case.”
Nevertheless, similar cases brought by the SEC against exchanges like Binance and Kraken could still influence Judge Failla’s thinking.
Ruling expected within weeks
Although the hearing examined each service in detail, it was specifically scheduled for Judge Failla to closely evaluate Coinbase’s motion to dismiss the entire case.
Failla did not announce whether she would dismiss all or part of the lawsuit. Her decision will come alongside recent rulings by other judges in the same district court (though she gave no indication of timing, a written ruling is likely within the coming weeks).
If the judge denies Coinbase’s motion to dismiss (which is likely), the case will proceed into the discovery phase. After discovery concludes, both the SEC and Coinbase may file motions for summary judgment.
Notably, at multiple points during the hearing, the judge praised an amicus brief submitted by the crypto advocacy group DeFi Education Fund, which detailed the technical nature of Coinbase Wallet and Coinbase Staking, arguing both fall outside the SEC’s jurisdiction.
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