New York District Judge Katherine Polk Failla was in court Wednesday examining whether tokens listed on Coinbase’s exchange are securities.
Coinbase was sued by the Securities and Exchange Commission in June for allegedly operating as an unregistered exchange, broker, and clearing agent. Coinbase refuted these claims, asserting that the incident was as follows: fired It accuses regulators of taking “regulation by enforcement approach.”
Coinbase Attorney William Savitt In exploring how securities are defined, we marked the difference between “investing in Beanie Baby Inc. and buying Beanie Babies.”
The SEC said in its June complaint that the tokens, including SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO, were securities.
Savitt pointed out that Coinbase does not claim the tokens listed on its website can in any way be considered securities.
“We do not take the view that a token transaction can never be an investment contract,” he said. However, the SEC added that the lawsuit did not present any allegations that would meet the definition of an investment contract.
He also said he agrees with the SEC that Coinbase does not need a formal contract signed by the buyer to enter into an investment agreement. However, just because token buyers read the whitepaper and other information about the token project does not mean they will purchase the investment contract, he said.
Savitt also refuted the SEC’s argument that the sale of tokens on Coinbase should be considered an investment contract because the token project may have made specific promises to the purchaser and the purchaser purchased the token in anticipation of a price increase.
“There has to be a statement to convey enforceable promises, which is the irreducible minimum of what can be thought of as an investment contract,” Savitt said.
What makes blockchain tokens really different from securities is that anyone who purchases a stock, whether directly from the issuer or on the secondary market, gets all the rights that grant a holder of that security. But that’s not the case with tokens, Savitt said.
bitcoin crash
In an interesting turn in the debate, the SEC and Coinbase lawyers clashed over why Bitcoin is definitely not a security.
In part 1 of the hearing, SEC’s Patrick Costello pointed out that the oldest cryptocurrencies are “not securities because there is no ecosystem behind them.” Therefore, people who purchase Bitcoin do not invest in regular companies. Coinbase’s Savitt addressed this topic in his closing statement, noting that Bitcoin certainly has an ecosystem like any other cryptocurrency.
Coinbase questioned past court rulings.
Judge Failla asked Coinbase’s lawyer whether New York District Judge Jed Rakoff’s decision last month was wrong when the judge sided with the SEC that Terraform Labs and its former CEO Do Kwon offered and sold unregistered securities. .
Coinbase’s lawyer said he had “no idea” but added that the exchange disagreed with some of Rakoff’s analysis.
“We can accept that analysis,” the lawyer said, because Rakoff’s decision ultimately says there must be a contract or contractual agreement.
Other judges have taken a straightforward stance in deciding whether the cryptocurrency in question is a security. Failla also asked Coinbase’s lawyer about the infamous Ripple case.
If so, New York District Court Judge Analisa Torres said: rule In July, it said some of Ripple’s programmatic XRP sales did not violate securities laws due to its blind bidding process. She also ruled that other direct sales of tokens to institutional investors were securities, giving the SEC a partial victory.
Judge Failla is not convinced about the main issue doctrine.
Meanwhile, Justice Failla referred to the leading question principle applied by Coinbase, noting that it very rarely becomes part of a court decision. She said she was “fearful of doing exactly what” Coinbase is asking the SEC to stop it from doing: exercising more power than the law allows.
This principle requires that agencies obtain explicit congressional approval to decide on matters of national importance. Coinbase argued that this principle would apply, and that the SEC was attempting to usurp Congress’ authority and take action “with legislative effect.”
Failla said that in more than 10 years on the bench, no one had ever questioned the doctrine until this case.
“From what I’ve read or the research I’ve done in this area, this doesn’t happen very often, and even less often actually gets found in the courts,” Failla said.
Failla said there is a “natural hesitancy” to apply the doctrine because it is not done often.
Judge Failla ended the hearing late Wednesday, saying both sides had answered some of his questions but had many more.
“I can’t decide this from the bench now,” Failla said.
If the judge denies Coinbase’s request to dismiss the case, the case will move on to discovery. Once discovery is concluded, both the SEC and Coinbase can move for summary judgment.
If the judge isn’t convinced, it will go to trial and go to a jury, but that likely won’t happen until 2025.
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