Coinbase seeks appeal in SEC case over crypto classification

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Coinbase has filed a motion in federal court seeking permission to pursue an interlocutory appeal regarding a recent ruling concerning investment contracts.

The crypto exchange’s appeal focuses on whether a digital asset transaction, which does not involve any obligations to the original issuer of the asset, should be considered an investment contract regulated by the U.S. Securities and Exchange Commission (SEC). 

In March, Judge Katherine Failla denied Coinbase’s motion to dismiss the SEC’s case against it. In her decision, she referenced an opinion from a judgment involving the defunct crypto company Terra, suggesting that certain digital assets could be deemed investment contracts under the Howey Test, especially if they are part of a broader ecosystem.

The Howey test is a legal standard used to determine whether certain transactions qualify as investment contracts. Coinbase views its application to digital assets as a pivotal legal question, especially given conflicting opinions from different judges. This disagreement, Coinbase argues, meets the criteria for a controlling question of law, a crucial factor in securing an interlocutory appeal. 

As Fox journalist Eleanor Terrett noted on Friday, April 12, interlocutory appeals are typically challenging to obtain before a final judgment is rendered. See below.

The SEC itself faced difficulties when it attempted a similar appeal in the Ripple case last July, disputing Judge Analisa Torres’s ruling on secondary market token sales.

However, despite the low likelihood of success for interlocutory appeals like the one Coinbase is filing, they can have significant implications if approved. If the appeals process moves forward, the industry could be closer to potential clarifications from higher courts, including the U.S. Supreme Court.

Coinbase responds

In a statement on social media, Coinbase’s chief legal officer, Paul Grewal, highlighted that the central question revolves around whether an investment contract necessitates “something contractual.”

The exchange argues that an investment contract must involve contractual obligations after the sale, while the SEC maintains a different perspective.

The outcome of this legal dispute is important for the crypto sector in the U.S. The SEC’s classification of crypto transactions as investment contracts subjects them to regulatory oversight, including registration requirements. 

However, industry players like Coinbase argue that once digital assets are traded on secondary markets and are no longer linked to their initial issuers, they should not fall under the SEC’s jurisdiction.

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