SEC Rebuts Coinbase’s Attempt to Get Appeals Court to Answer Key Crypto Question

U.S. regulators said an appeals court should ignore Coinbase’s request to review how or whether traditional securities rules apply to cryptocurrencies.

Coinbase, the largest U.S. crypto exchange, has filed for leave to ask the Second Circuit Court of Appeals whether the Howey Test, the Supreme Court’s long-standing review of securities, should apply to digital assets. Coinbase hopes this won’t be the case.

Coinbase did not successfully argue that this was necessary, the U.S. Securities and Exchange Commission said Friday.

This question is at the heart of the SEC’s accusation that Coinbase operates as an unregistered broker, exchange and clearinghouse in the United States. If some cryptocurrencies are securities — and therefore meet the Howey Test — that means Coinbase must get approval from the SEC before allowing customers to buy and sell them, according to regulators.

The SEC argued in its filing that Coinbase was trying to create a “new legal test” for how cryptocurrency can fit into existing securities, which a district court judge had already rejected.

“Coinbase is currently unable to develop a single, coherent version of this theory that it claims presents a controlling question,” the filing said. “This is not surprising; in eighty years ‘no court’ has required post-sale ‘contractual commitments’ or anything beyond the three factors expressly enumerated by the Howey Supreme Court.”

The filing alleged that Coinbase failed to successfully argue that there was a “controlling question” in its filing.

The SEC also argued that while Coinbase’s objection focused on a specific legal issue related to “contractual obligations,” Howey’s actual argument regarding its application to crypto was an entirely different question.

“Similarly, in trying to meet the ‘imputed value for a few cases’ factor, Coinbase is once again moving away from the ‘contractual obligations’ question, this time ‘[h]The application stated that Howey applies to secondary market crypto transactions.

Judge Katherine Polk Failla, who is overseeing the SEC’s lawsuit against Coinbase, will have to rule on the interlocutory appeal. If it sides with Coinbase, the exchange will be able to send the request to the actual appeals court.

Read more: SEC Says XRP Decision Requires Appellate Court Review