In a closely watched case between Coinbase and the U.S. Securities and Exchange Commission (SEC), Judge Failla, known for his cryptocurrency-informed rulings, is presiding over the hearing.
Judge Failla previously presided over cases involving Tether, Bitfinex and UniSwap. Last year, it dismissed a class-action lawsuit against UniSwap, ruling that a decentralized technology could not be held liable for customer losses. In the same decision, he classified Bitcoin (BTC) and Ethereum (ETH) as commodities.
During the Coinbase preliminary hearing, Judge Failla posed tough questions to SEC attorneys and questioned the agency’s methods of communicating with companies that potentially engage in illegal securities trading.
The judge praised “people in the DeFi industry” for “really good” amicus briefs that he said explained staking and wallet usage “arguably better” than the SEC’s brief. He also noted that the SEC did not offer a counterargument to the legal basis of the Howey test in its briefing.
In his conversation with the SEC attorney, Judge Failla interjected to question whether the tokens under discussion were merely computer code, echoing Coinbase’s arguments. The SEC attorney argued that the ecosystem surrounding a token is what makes it a security, citing Judge Rakoff’s decision in the Terra case.
When asked whether Bitcoin is a “valid currency as a substitute for fiat currency,” the SEC attorney avoided giving a direct answer, stating that Bitcoin differs from other tokens in that it does not have an ecosystem.
Judge Failla asked whether the risks associated with staking on Coinbase were similar to those in a savings account. The SEC lawyer said the risks are not unique to crypto staking but also present in a savings and loan bank.
Judge Failla expressed concern about the broad definition of what constitutes a security, asking the SEC attorney what consequences people who purchased the 12 or 13 tokens discussed would face. The SEC attorney stated that if these purchases are determined to be securities, the buyers will be entitled to a refund.
SEC counsel argued against the need for two categories of investors, citing Judge Torres’ decision in the Ripple case. “Whether you are an expert or not, at the end of the day you are still buying the same token,” he said. This was in reference to Judge Torres’ July decision distinguishing sales of the XRP token to individual investors in the secondary market from sales to institutions or ” specialist ” investors.
Coinbase’s attorney countered, saying, “We do not take the view that not all exchange-traded tokens are investment contracts, but this requires stating the facts missing from the criminal complaint.” The lawyer argued that some tokens may qualify as securities, but the SEC could not prove that the 13 tokens mentioned in the complaint fit this definition.
Judge Failla asked the SEC why it should ignore Senator Lummis’ motion to dismiss the case. The SEC lawyer responded that one senator’s opinion should not override 90 years of securities law.
Failla then implied that the Howey test is now obsolete and cannot be applied to cryptocurrencies, saying:
“We’ve had a good ride. We’ve had 90 years where these securities laws have been applicable to these markets. But now we have something new.”
Coinbase’s attorney argued that the SEC was trying to put these transactions under the Howey Test even though they did not qualify.
Judge Failla asked Coinbase’s attorney to review Judge Rakoff’s Terraform decision and Judge Torres’ Ripple decision as they relate to investment contracts in the primary and secondary markets. Coinbase’s lawyer argued that it was not responsible for the activities of third parties to which the Coinbase wallet was connected, citing the Uniswap case that Failla himself presided over (and ultimately dismissed).
*This is not investment advice.
