How the Coinbase vs SEC Showdown Could Alter “Securities”

In a court battle with far-reaching implications, crypto giant Coinbase clashes with the SEC over the definition of a “security.”

SEC Eagles trying to go after Coinbase.
Created by Kornelija Poderskytė from DailyCoin
  • A legal showdown between Coinbase and the SEC has been unfolding.
  • The lawsuit has focused on whether certain digital tokens have passed the litmus of the Howey Test.
  • The SEC‘s crosshairs have also targeted Coinbase‘s intricate “staking” program.

The air in Manhattan’s federal court crackled with anticipation as Coinbase, the US’s largest crypto exchange, squared off against the Securities and Exchange Commission (SEC) in a legal showdown with consequences far beyond Wall Street. At stake? The very definition of “security” in the digital age.

Coinbase and SEC Battle Over Howey Test Interpretation

Coinbase stands accused by the SEC of facilitating the trading of unregistered securities in the form of certain digital tokens like Solana and Cardano. But Coinbase argues these assets are not securities under the established Howey Test, a legal framework for defining investment contracts. 

Sponsored

This four-hour hearing on January 17th was just the first salvo in a battle expected to reverberate throughout the crypto industry and potentially reach the Supreme Court.

The SEC, armed with analogies to Beanie Babies and stock shares, argued that these tokens represent investments in a “larger enterprise,” akin to traditional securities. They claim buyers anticipate profits from the collective efforts of others, fulfilling the key criteria for a security.

Coinbase, however, countered that such a broad interpretation would stretch the definition of securities beyond its intended purpose. Their lawyer, William Savitt, argued that token buyers don’t enter into contracts expecting profits from a common enterprise but rather participate in a decentralized ecosystem. This, he argued, falls outside the SEC’s jurisdiction.

SEC Targets Coinbase’s Staking Program

Adding another layer of complexity, the SEC also targeted Coinbase’s “staking” program, a system where users pool their assets to validate blockchain transactions and earn rewards. The SEC claims this program should be registered as an offering of securities. Coinbase, however, vehemently disagrees.

Analysts like Bloomberg Intelligence’s Elliot Z. Stein see Coinbase with a 70% chance of victory, citing their strong arguments against the SEC’s claims and the judge’s apparent focus on finding a limiting principle for the definition of “investment contract” that wouldn’t ensnare collectibles.

On the Flipside

  • The Howey Tests’ roots in traditional investments might not seamlessly translate into cryptocurrencies.
  • While Elliot Z. Stein posits a 70% chance of Coinbase‘s victory, the mere existence of odds implies uncertainty.

Why This Matters

This legal battle isn’t just about Coinbase’s future. Its outcome could set a critical precedent for the entire crypto industry, influencing regulations, investor confidence, and how we understand digital assets in the financial landscape.

To learn more about the evolving Coinbase vs. SEC case and its potential impact on the crypto industry, read here:
No Decision on Coinbase vs. SEC Case, Legal Battle Continues

To learn why the SEC’s case against Coinbase faces hurdles in securing a dismissal, read here:
Here’s Why SEC’s Case vs. Coinbase Is Unlikely to Be Dismissed

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Kyle Calvert

Kyle Calvert is a cryptocurrency news reporter for DailyCoin, specializing in Ripple, stablecoins, as well as price and market analysis news. Before his current role, Kyle worked as a student researcher in the cryptocurrency industry, gaining an understanding of how digital currencies work, their potential uses, and their impact on the economy and society. He completed his Masters and Honors degrees in Blockchain Technology within Esports and Business and Event management within Esports at Staffordshire University.