Coinbase has been granted permission by a U.S. judge to pursue a limited appeal of the Securities and Exchange Commission’s (SEC) accusations that the crypto exchange engaged in the trading of unregistered securities, in a move that could have broader implications for the crypto industry.
Coinbase had filed a request with the U.S. District Court for the Southern District of New York to ask the Second Circuit to consider whether the SEC was wrong in its assertion that Coinbase handled the trading of crypto securities without registering them with the agency. If the Second Circuit agrees to hear the appeal, a decision in Coinbase’s favor would carry significant weight in the ongoing debate over the classification of digital assets.
Coinbase had argued that the tokens in question, which are traded on its secondary market, do not meet the definition of a security under the Howey test, which is used by the SEC to determine whether an asset is considered an investment contract and therefore a security. Among other points, Coinbase has maintained that the issuers of these tokens do not owe anything to the buyers, rendering the tokens distinct from securities.
The SEC, on the other hand, has maintained that some of the tokens traded on Coinbase’s platform do qualify as securities, and that the exchange was obligated to register them with the agency. This clash in interpretations has led to the legal dispute between the parties.
In her decision, Judge Katherine Polk Failla noted that she does not "appreciate Coinbase's efforts to cast aspersions on the SEC’s approach to crypto-assets." However, she acknowledged the conflicting rulings from different federal courts on similar questions, writing that "conflicting decisions on an important legal issue necessitate the Second Circuit’s guidance."
Coinbase had initially requested that the court grant the interlocutory appeal in April 2024, but Failla ultimately approved the request now "because it presents a controlling question of law regarding the reach and application of Howey to crypto-assets, about which there is substantial ground for difference of opinion, and the resolution of which would advance the ultimate termination of the SEC’s enforcement action."
Coinbase Chief Legal Officer Paul Grewal reacted to the decision on the social-media site X, writing, "We appreciate the court's careful consideration. On to the Second Circuit we go."
A spokesperson for the SEC, which is still led by crypto skeptic Gary Gensler until he steps down as chairman when President-elect Donald Trump is sworn in on January 20, declined to comment on the latest ruling.
The broader question of what constitutes a crypto security is likely to continue to be litigated in different courts and may ultimately reach the Supreme Court. However, this legal wrangling could become moot if Congress passes a new law to define how digital assets and their trading should be regulated in the U.S. The crypto industry is actively engaging in political operations and lobbying efforts to steer this year's new Congress toward more industry-friendly legislation.
Finally, the SEC's leadership is set to change hands to Republican control, which could bring a greater openness to the crypto industry. A new agency chair may also alter the course of the SEC's enforcement actions, including this court case.
