Coinbase has asked a US appeals court to rule on whether or not cryptocurrency trading activity on its platform should be subject to securities laws.
In a court filing Tuesday, Coinbase’s lawyers urged the Second Circuit Court of Appeals to hear its case, arguing that it “presents the best opportunity to decide the fundamental legal question of how to treat secondary trading in digital assets.”
“This case cries out for the Court’s immediate attention,” Coinbase’s lawyers wrote in their petition. “Whether secondary market trading of digital assets falls within federal securities laws is a question of immense importance to the crypto industry, consumers, financial institutions, and lower courts that need guidance. “This case presents an ideal vehicle to address that issue and provide clear rules for this multi-billion dollar industry.”
Coinbase argued that cryptocurrency trading on its platform should not actually trigger federal securities laws because secondary crypto transactions do not meet all the requirements of the Howey test, the long-standing legal framework used to decide what qualifies as a “investment contract”. Because buyers and sellers on the Coinbase platform are matched in a blind supply and demand system and are therefore anonymous to each other, there can be no common enterprise between them, according to the document.
The exchange’s petition comes two weeks after the Southern District of New York (SDNY) issued a rare stay in the US Securities and Exchange Commission’s (SEC) case against Coinbase, giving it time to Coinbase to appeal to a higher court for clarity.
The SEC sued Coinbase in June 2023 for allegedly acting as an unregistered exchange, broker, and clearing agency. When Coinbase attempted to have the lawsuit dismissed, the district court judge overseeing the case denied its motion, finding that the SEC had made a “plausible” argument that the exchange was violating federal securities laws. However, on January 7, the judge remanded the issue to a higher court, writing that “conflicting decisions on important legal questions require guidance from the Second Circuit.”
The SEC’s case against Coinbase will be put on hold while the exchange seeks answers from the Second Circuit.
On the same day Coinbase’s petition was filed, the SEC, now under the leadership of Republican Acting Chairman Mark Uyeda, announced the formation of a cryptocurrency task force headed by commissioner Hester Peirce, a cryptocurrency supporter. The move signals a move away from the agency’s “regulation by enforcement” approach to cryptocurrencies under former Chairman Gary Gensler.
“To date, the SEC has relied primarily on enforcement actions to regulate cryptocurrencies retroactively and reactively, often adopting untested legal interpretations along the way,” the SEC said in a statement. “Clarity around who needs to register and practical solutions for those seeking to register have been elusive. The result has been confusion about what is legal, creating an environment hostile to innovation and ripe for fraud. “The SEC can do better.”
