Judge grills the SEC with pointed questions as Coinbase hearing begins

New York District Judge Katherine Polk Failla grilled the Securities and Exchange Commission in court on Wednesday, asking direct questions about what constitutes a security, staking, and how the major questions doctrine applies to the case.

Coinbase was sued by the regulator in June for allegedly operating as an unregistered exchange, broker and clearing agency. Coinbase has pushed back on those claims, arguing for the case to be dismissed and accusing the regulator of taking a “regulation by enforcement approach.”

From its June complaint, the SEC had said tokens including SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO were securities.

In court on Wednesday, Failla asked the SEC whether the token issuers named in the complaint violated the securities laws.

“Well, not exactly, your Honor,” the agency’s lawyer said. Those tokens named in the complaint are computer code, the lawyer added.

“I’m smiling sir because that’s kind of what your friends at the back table are saying and they’re wondering why we’re here,” Failla said.

Beanie Babies

Failla also asked the SEC about how it defined securities, expressing concern that it may be too broad and sweeping in collectibles — like Beanie Babies.

“I’ve not thought about Beanie Babies in decades, and yet it’s being presented to me in multiple briefs,” Failla said.

“It is a real fear that I have that your argument is just sweeping too broadly,” Failla added. The SEC’s lawyer said they were not “contending that collectibles are securities.”

Failla also shed light on her position in not wanting to become an “activist judge,” mentioning she had received a brief from a U.S. senator, Sen. Cynthia Lummis, R-Wyo., who had called for the SEC’s case against Coinbase to be dismissed.

The Howey Test was enacted with Congressional intent and one lawmaker cannot override Congress’ will, the SEC’s lawyer said. “The major questions doctrine is there to make sure everyone stays in their lane,” the SEC’s lawyer continued.

The doctrine says that if an agency wants to decide on an issue that has major national significance, it has to be supported by clear congressional authorization.


Failla also pushed back on the SEC’s claim that Coinbase has been engaged in an unregistered securities offering through its staking-as-a-service program.

Failla said she found staking to be the “least traditional investment like of the functions that you were complaining about here.”

Judge Failla is now questioning Coinbase.

If the judge denies Coinbase’s motion, which is unlikely, then it goes to discovery. At the end of discovery, both the SEC and Coinbase could bring a motion for summary judgment.

If the judge isn’t convinced, then it would proceed to trial and be presented to a jury, but that wouldn’t likely happen until 2025.

Uniswap Labs case

Failla dismissed in full a class action lawsuit brought against Uniswap Labs, the Uniswap Foundation and investors Paradigm, Andreessen Horowitz and Union Square Ventures last year, declining to “stretch” federal securities laws in that case, suggesting that such expansions are the domain of Congress.

Other judges have taken a direct stance in deciding whether cryptocurrencies in question are securities or not.

New York District Court Judge Analisa Torres ruled in July that some of Ripple’s sales, called programmatic, of XRP did not violate securities laws because of a blind bid process in place for them. She also ruled that other direct sales of the token to institutional investors were securities, leaving a partial win for the SEC.

Judge Jed Rakoff in the U.S. District Court for the Southern District of New York sided with the SEC last month in its claim that Kwon and Terraform Labs offered and sold unregistered securities. Rakoff granted summary judgment for the SEC on that claim, while also siding with Terraform “on the claims involving offering and effecting transactions in security-based swaps,” according to an order filed in December.


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