The US Securities and Exchange Commission’s (SEC) case against crypto exchange Coinbase has taken a new turn with the country’s state authorities coming forward in support of the former.
In a campaign spearheaded by federal securities regulators, the US state authorities and legal experts joined hands to argue that Coinbase operated an unregistered securities exchange.
The SEC had filed a lawsuit against the exchange in June this year, accusing Coinbase of operating as an unregistered securities exchange. Here, the regulatory watchdog listed 13 tokens as examples which could be considered as securities. This included Solana, Cardano and Polygon.
To this, the crypto exchange responded saying that the SEC hasn’t shown any evidence of investment contracts in the examples.
In the recent turn of events, three new legal filings have lent support to the SEC, asserting the regulator’s power over cryptocurrencies. These amicus briefs allow parties who are interested but not directly affected by the case to aid the court’s reasoning.
Here, the regulators contended that crypto is neither significant nor special, and that the SEC can take on digital assets under existing law. Coinbase, on the other hand, had recently also argued that the SEC is exceeding its powers in bringing about the case.
Saying that the regulator’s legal position is neither novel nor remarkable, North American Securities Administrators Association (NASAA) in the recent filings argued that the SEC’s theory in this case is “consistent with the agency’s longstanding public position” and “well within the bounds of established law”. NASAA is a century-old body whose 68 members include securities regulators from all 50 US states.
The SEC and state securities regulators have also taken a consistent position that certain digital assets are investment contacts, said the filing. Adding on, it noted that the SEC has more than adequately alleged that the Coinbase staking program is an investment contract.
It then quoted the definition of ‘investment’ from the Howey test, where it says that the investor “commits his assets to the enterprise in such a manner as to subject himself to financial loss”. In saying this, the filing noted Coinbase staking investors commit their digital assets to the staking enterprise and subject themselves to financial loss.
Adding on: “Coinbase also benefits from its investors’ commitment of assets to the enterprise by obtaining more assets to stake, thereby increasing both the likelihood of earning rewards and the magnitude of Coinbase’s return. More specifically, Coinbase receives significant revenue from its staking operations, from which it takes a commission of up to 35% before crediting rewards to investors on a pro rata basis.”
In another brief filed by two academic administrative lawyers, Todd Phillips of Georgia State University and Beau Baumann of Yale Law School, Coinbase was claimed to be misguided in invoking a legal doctrine that prevents government agencies from making economically significant interventions without clear congressional authority.
Recently, the US Supreme Court had broadened the major questions doctrine when it struck down President Joe Biden’s cancellation of student debt. However, the pair argued that deploying this for crypto would be “absurd”, creating a different definition of securities for cases brought by private litigants rather than government agencies.
The third amicus brief was from New Finance Institute (NFI) which is a public benefit corporation that operates two blogs on finance and financial empowerment. It argued that Congress intended investor protection measures to have a scope broader than merely capital-raising transactions.
The NFI filing said: “The purchasing of crypto tokens should not be characterized as investments due to the lack of cash flow generation (a long-established prerequisite for any true investment). Such purchases are still investment contracts, however, because the buying public is denied the full and fair disclosure that they are not investing.”
The SEC has various other court cases along the same lines against crypto exchanges, including Coinbase, Binance and Bittrex. It contends that the native coins for blockchains such as Solana ($SOL), Cardano ($ADA), Polygon ($MATIC) resembled conventional financial instruments.
