Coinbase has submitted a petition to a U.S. appeals court regarding the status of crypto trading activities on its platform in relation to securities laws.
In a filing made on Tuesday, Coinbase’s legal team urged the Second Circuit Court of Appeals to take up the case, asserting that it ‘presents the single best opportunity’ to clarify how secondary trading of digital assets should be regulated.
“This case cries out for the Court’s immediate attention,” Coinbase’s lawyers stated in their filing. “Whether secondary-market trading of digital assets falls within the federal securities laws is crucial for the crypto industry, consumers, financial institutions, and lower courts needing guidance. This case provides an ideal pathway for addressing that question and establishing clear regulations for this multi-trillion-dollar industry.”
The exchange contended that its platform’s crypto trading should not invoke federal securities regulations as secondary transactions purportedly do not fulfill all criteria of the Howey test, which is the established legal framework for determining what constitutes an “investment contract.” Because participants in Coinbase’s trading platform are kept anonymous from one another through a blind bid-ask system, the filing maintains there cannot be a common enterprise.
The petition from Coinbase follows a significant stay issued by the Southern District of New York in the U.S. Securities and Exchange Commission’s (SEC) case against the company, which allows Coinbase to seek clarity from a higher court.
The SEC filed suit against Coinbase in June 2023, accusing it of operating as an unregistered securities exchange, broker, and clearing agency. After Coinbase attempted to dismiss these claims, the overseeing district court judge rejected this motion, suggesting the SEC had presented a plausible argument regarding violations of federal securities laws. However, on January 7, the judge referred the matter to a higher court, indicating that conflicting decisions about critical legal issues necessitate guidance from the Second Circuit.
While Coinbase seeks further clarification from the Second Circuit, the SEC’s legal action against the firm remains on hold.
Coinbase’s petition coincides with the SEC’s announcement of forming a new task force aimed at crypto, now under the leadership of Republican Acting Chair Mark Uyeda. This move signifies a shift from the agency’s previous more aggressive regulatory approach under former Chairman Gary Gensler.
“To date, the SEC has relied primarily on enforcement actions to regulate crypto retroactively and reactively…,” stated the SEC. “Clarity regarding registration requirements and practical solutions for those wanting to register have been elusive, creating an environment that is hostile to innovation and conducive to fraud. The SEC can do better.”
