Coinbase faces SEC scrutiny in crypto securities case

The primary issue concerns differing perspectives on the classification of digital assets as securities. The case, significant for the cryptocurrency industry, revolves around Coinbase's request for the dismissal of the SEC's lawsuit, which alleged the violation of securities regulations. 

During the hearing, Judge Katherine Polk Failla focused on legal precedents defining securities and examined attributes of various crypto tokens, including Solana, Cardano, and Polygon, traded on Coinbase. The SEC contends that these tokens should be registered as securities, while Coinbase argues that crypto assets, unlike traditional securities, do not meet the criteria of an investment contract. 

The Judge refrained from delivering an immediate verdict, expressing the need for further consideration after the extensive four-hour hearing. The judge's decision is expected to provide clarity on the SEC's jurisdiction over digital assets, impacting the broader crypto sector.

The origin of the legal battle

This lawsuit is part of the SEC's broader initiative targeting the crypto industry. Initially concentrating on companies offering digital tokens, the SEC has expanded its focus to include trading platforms, clearing activities, and broker-dealers. 

In June 2023, the SEC sued Coinbase, accusing it of facilitating the trading of at least 13 crypto tokens without proper registration. The legal dispute relies on the interpretation of the Securities Act of 1933 and a US Supreme Court case that defines whether an investment product qualifies as a security.

Coinbase's position asserts that crypto-assets do not fulfil the criteria of an investment contract. However, the SEC argues that the crypto tokens in question represent a larger 'enterprise,' similar to an investment contract, as their value increases with the growth of the associated network or ecosystem.

Reuters reports that the SEC further contends that the purchase of digital assets on platforms such as Coinbase equates to acquiring tokens as investments, comparable to stock shares or bonds. Coinbase's defence argued that buyers are not entering contracts entitling them to proceeds from a common enterprise.

Despite Coinbase raising concerns about the "major questions doctrine," asserting that the lawsuit exceeds regulatory authority without specific congressional authorisation, the judge appeared sceptical of this argument according to Reuters. The SEC's lawsuit also targeted Coinbase's 'staking' program, claiming it should have been registered with the agency due to its commission-based structure and reward distribution to customers.