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Judge Questions SEC’s Authority in Coinbase Lawsuit

2024.01.18

 

Key Takeaways

  • U.S. judge challenges the SEC’s regulatory scope in Coinbase lawsuit.
  • The case could set a precedent for the crypto industry’s legal framework.

The SEC vs. Coinbase: A Legal Showdown

In a significant legal battle, the U.S. Securities and Exchange Commission (SEC) has sued Coinbase, triggering a federal judge to question the SEC’s jurisdiction over markets like cryptocurrencies. U.S. District Judge Katherine Polk Failla, during a hearing in Manhattan federal court, expressed concerns that the SEC’s arguments might be overly broad, potentially impacting markets beyond its regulatory authority.

The Scope of SEC’s Regulatory Power

The case centers around the SEC’s claim that Coinbase has listed at least 12 tokens qualifying as securities and operates wallet services and staking programs illegally. This assertion is based on a 78-year-old Supreme Court case defining investment contracts, which the SEC argues most cryptocurrencies fall under. However, Coinbase counters that most digital assets are commodities, not securities, thus falling outside the SEC’s jurisdiction.

Debating the Definition of Cryptocurrencies

Coinbase’s defense hinges on differentiating between investing in a company (like “Beanie Baby Inc.”) and purchasing the products themselves (such as Beanie Babies). The company argues that crypto assets, lacking dividends or contractual commitments, should not be treated as securities. This distinction is central to the debate over whether the SEC can regulate these digital assets.

The Legal Strategy and Major Questions Doctrine

Coinbase’s legal team is also invoking the “major questions doctrine,” arguing that the SEC is overstepping its regulatory bounds without explicit direction from Congress. The doctrine restricts federal agencies from implementing significant regulations without congressional approval. Coinbase asserts that accepting the SEC’s definition of security would have sweeping implications for the entire crypto industry.

Judge Failla’s Stance and the Future of Crypto Regulation

Judge Failla questioned the applicability of the “major questions” doctrine to the crypto industry, suggesting that the industry might not be so significant as to warrant its application. An SEC lawyer argued that the crypto industry, compared to global capital markets, is relatively small and doesn’t meet the threshold of economic significance.

 


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