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Coinbase has filed a so-called interim complaint in federal court to challenge just a single legal point at the heart of its dispute with the U.S. Securities and Exchange Commission.
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The requested appeal would ask a higher court to consider whether a digital asset transaction that does not impose an obligation on the original issuer of the asset should be considered an investment contract that would be regulated by the SEC.
Seeking to resolve the legal impasse at the center of the crypto industry’s dispute with the U.S. Securities and Exchange Commission (SEC), Coinbase filed a preliminary appeal on Friday that would ask a higher federal court to delve deeper into the regulator’s stance on digital assets, even as the SEC’s broader case proceeds through the judicial system.
The U.S. exchange has filed a so-called interim appeal that raises a narrow point of legal disagreement and seeks to review it on its own, in this case by the U.S. Court of Appeals for the Second Circuit. Recently, a federal judge rejected Coinbase’s efforts to dismiss the SEC case against the company before trial, and now Coinbase is officially asking the court to weigh in on whether the SEC can treat a digital asset transaction as an investment contract if it doesn’t this entails any legal obligation of the original issuer of the asset.
Coinbase argued in its appeal that the SEC’s use of the so-called Howey test on cryptocurrency assets left an unclear understanding of what constitutes a security.
“Applying Howey to digital asset transactions raises difficult questions,” Coinbase argued. “That members of Congress, senators and regulators were divided in their response illustrates the difficulty of the issue, and the differing court outcomes illustrate the point.”
Such objections are typically far-fetched, as the SEC discovered when it filed a similar motion in its own case against Ripple, but it was rejected. But if that appeal were granted, the issue could bring the industry one step closer to what could ultimately lead to a U.S. Supreme Court ruling that finally settles the matter.
When asked for comment on the appeal, an SEC spokesman said that “any response will be made in public filings with the court.”
Investment contracts are securities regulated by the SEC. Therefore, if a crypto transaction meets the requirements, it falls within the authority’s purview and should be properly registered legally. The regulator has argued in lawmakers and courts that the vast majority of digital assets are securities, but Coinbase and others in the industry claim that the token is no longer available once the asset enters secondary markets and no longer with it is affiliated with the company that issued it The legal reach of the SEC. Resolving this dispute would be fundamental for the US crypto sector.
Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York ruled last month that the SEC had sufficiently established its legal premise in its allegations against Coinbase that the court would proceed with most of the case. Coinbase’s re-appeal of part of this decision would need to be accepted by Judge Failla and the Second Circuit in order to move forward. If they settle for this, the rest of the case will remain in Failla’s court while the regulator and the company prepare for trial.
The Coinbase case is considered one of the crucial legal disputes that could determine the course of the industry in the USA. So far, the SEC has had a mixed record, with some big losses (such as against Ripple) and some significant wins (such as in its case against Terraform Labs and in an insider trading case involving Coinbase).
Read more: What a judge said about the SEC’s lawsuit against Coinbase
UPDATE (April 13, 2024, 00:20 UTC): Adds additional details.
UPDATE (April 13, 2024, 02:28 UTC): Adds response from SEC.