HomeBusinessWhat a judge said about the SEC's lawsuit against Coinbase

What a judge said about the SEC’s lawsuit against Coinbase

Between Coinbase, Custodia, Roman Storm and Sam Bankman-Fried there was one lot from last week’s news. Let’s get started.

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The narrator

Coinbase and Custodia both lost early and preliminary lawsuits. The Coinbase loss was more or less expected – companies rarely win much on a vote of no confidence at such an early stage – but still quite enlightening.

Why it matters

At some point, the cases involving the U.S. Securities and Exchange Commission will go to appellate courts and perhaps even the U.S. Supreme Court if they are not resolved first. Until then, these court decisions shed light on how judges view the crypto industry.

Breaking it down

Right Katherine Polk Failla mainly ruled against Coinbase after a first request for judgmentdismissing the SEC’s claims about Coinbase Wallet, but leaving a substantial portion of the complaint intact.

The usual disclaimers apply: This is an initial motion and the judge was required to accept the facts of the SEC complaint as alleged. We also don’t usually see cases being completely rejected at this stage, so the chances of Coinbase succeeding were also quite slim.

That said, the judge laid out a pretty clear roadmap in her 84-page ruling, adopting common industry arguments about whether crypto meets the standards for the Big Question Doctrine (no), which means a cryptocurrency ecosystem in terms of these types of lawsuits (More on this later), whether a written contract is required to satisfy the terms of an “investment contract” as defined in SEC v. Howey (no) and whether some of the assets the SEC holds in her complaint mentioned effects are (it’s plausible). In her ruling, the judge rejected some of Coinbase’s arguments about how cryptos could be treated in the US

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As for the doctrine of the big questions, Judge Failla agreed with Judge Jed Rakoff, which sits in the same district, in ruling that the crypto industry does not meet the Supreme Court’s standards for what a major industry could be. In doing so, she became the latest judge to say that the SEC is well within its limits to take enforcement actions and regulate crypto, and does not need a mandate from Congress. Failla also agreed with Rakoff in other parts of her order.

“Contrary to Defendants’ assertions, neither Howey nor his descendants have held that the profits to be expected in a joint venture are limited to shares of a corporation’s income, profits, or assets,” the wrote judge, also referring to another Supreme Court. decision.

Quoting Rakoff again, Failla said a common enterprise would exist if a token issuer used the proceeds from a token sale “to further develop the broader ‘token ecosystem’.”

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Judge Failla explicitly rejected an argument that a formal contract is necessary for an “investment contract” to exist, countering another fairly common argument in these types of cases.

“First, there does not need to be a formal contract between the transacting parties for an investment contract to exist under Howey,” she wrote. “Indeed, courts in this Circuit have consistently rejected invitations from defendants in the cryptocurrency industry to include a ‘contractually based’ requirement in the Howey analysis.”

Arguments that cryptocurrencies are akin to Beanie Babies or baseball cards fell apart in court, as did the suggestion that the SEC could take jurisdiction over “essentially all investment activities” if no formal contract is required.

The judge seemed to suggest that every crypto is part of a common enterprise, because a token does not exist as an individual product.

“Unlike the transaction of goods or collectibles (including the Beanie Babies discussed at oral argument…), which can be consumed or used independently, a crypto asset is necessarily intermingled with its digital network – a network without which no token can exist. ,” she wrote.

The judge also looked at whether Coinbase has listed securities on the exchange, ruling that the regulator plausibly alleged that holders of at least two of them, Solana (SOL) and Chiliz (CHZ), could “reasonably expect to benefit” from Solana Labs. or the efforts of the Chiliz team around their respective tokens.

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“The parties do not dispute that to assert its claims, the SEC need only establish that at least one of these 13 crypto assets is being offered and sold as collateral, and that Coinbase has brokered related transactions, such that the transactions to that effect, Crypto-Asset would amount to operating an unregistered exchange, broker or clearing agency,” the order said.

The case will now enter the discovery phase, with both sides facing an April deadline to work together on a case management plan. Presumably, things will flare up afterward as the parties argue about who gets what and exchange documents.

This week

  • (The edge) The Verge’s Liz Lopatto delved into Vice’s demise in this thoroughly reported piece, which also contains some excellent lessons about journalism.

  • (The edge) Liz also attended Sam Bankman-Fried’s sentencing hearing last week.

  • (The Wall Street Journal) Large language model companies need more information – “high-quality text data,” in the words of Deepa Seetharaman’s article – than could be available to further develop their artificial intelligence tools.

If you have any ideas or questions about what I should cover next week or would like to share any other feedback, please email me at nik@coindesk.com or find me on Twitter @nikhileshde.

You can also join the group conversation at Telegram.

Until next week!

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