Coinbase argues stocks, Terraform Labs and Howey in 5-hour SEC face-off

United States District Judge Katherine Polk Failla has heard arguments from the Securities and Exchange Commission (SEC) and Coinbase on the crypto exchange’s motion for dismissal of a lawsuit filed by the regulator in June 2022.

The hearing was held for nearly five hours and provided an extensive overview of the key arguments in courts regarding the crypto space, assets and the SEC’s role in regulating the industry.

During the hearing, Judge Failla critically examined the regulator’s case against the crypto exchange, asking the SEC attorneys to explain why a digital token issuance would meet the Howey test, arguing the case was “too broad.”

In the SEC’s view, buyers of tokens are also investing in the network or ecosystem behind it, indicating there is a value proposition behind a token purchase. Coinbase’s attorneys, however, challenged the argument, claiming that Bitcoin — described as a commodity by an SEC attorney during the hearing — is also backed by a community and has a network.

Judge Failla delved into the definition of staking and secondary market transactions, as well as recent court rulings involving crypto firms, such as the Ripple and Terraform Labs case. Cointelegraph has summarized the hearing’s hottest topics below.

Coinbase is trying to create a different Howey test, says SEC

Attorneys representing the SEC argued that the exchange is trying to create a different version of the Howey test while allowing trade of crypto tokens that offer holders access to ecosystems that the regulator described as a “common enterprise.”

The SEC argued that the exchange independently conducted the Howey test, leading to differing interpretations regarding the status of certain tokens. This discrepancy in conclusions over the tokens regarding the test, according to the SEC, provides sufficient grounds to reject the motion and allow the case to proceed.

“We think they’re making up a new test, and we believe that our position is the one that’s most faithful and consistent, but in fact, compelled by the Howey test. It’s not just a plausible reading, as they claim it is.”

SEC v @coinbase Update IV

In an unusual move, the Judge dispensed with any prepared arguments from either side and instead went straight to questioning the lawyers.

The first 2 hours was spent exclusively questioning of the SEC lawyers.

The SEC lawyers were better prepared…

— MetaLawMan (@MetaLawMan) January 17, 2024

Terraform Labs case enters the stage

During the hearing, the SEC discussed a recent ruling on Terraform Labs that concluded it sold digital assets as securities without registration. The decision, according to the SEC, provided further grounds for its case against Coinbase.

The topic was heavily discussed over the hearing. As per SEC attorneys, the cases of Ripple and Terraform Labs may differ from Coinbase’s one, but the Howey test applies exactly in the same way.

“Our perspective is they’re identical in terms of the Howey test that applies,” said the SEC. “We think Coinbase is trying to create a different Howey test for when the people at this table might sell the tokens to each other on its platform and when Terraform might sell its tokens on Coinbase’s platform.

 And we think that’s just wrong, your honor.”

Coinbase’s legal team argued that Terraform Labs’ case did not involve secondary market transactions, such as the ones conducted on the Coinbase platform. Another key difference appointed in court is that, in Terraform Labs’ dispute, investors and the company were in a private relationship.

“But the Terraform case, first of all, as I know the court knows, did not involve secondary market transactions,” they argued.

There were no secondary market transactions in that case. […] Those were all situations where there was a relationship between the investor and the promoter.”

In addition, Coinbase counsel explored the legal requirements for establishing an investment contract under U.S. law, which requires a type of financial arrangement where an individual invests money in a venture managed by another party with the expectation of earning a profit.

“An investment contract, at a minimum, requires the contracting parties to agree or scheme together that the contractee will invest in the contractor’s profit-seeking endeavor.”

According to Coinbase, users trading tokens on its platform may or may not seek profit on the investment, as tokens can also be acquired for their utility. Judge Failla added that investors can purchase tokens because they are “cool” or because a friend owns them.

Ripple, stocks and more talks over secondary market transactions

Coinbase argued that token holders don’t receive dividends or have legal rights over a project just because they own tokens, which is different from…