Coinbase Asks US Appeals Court to Say On-Platform Crypto Trades Are Not Securities
Coinbase has petitioned a US appeals court to decide whether crypto trading activity on its platform should be subject to securities laws.
In a court filing Tuesday, Coinbase’s lawyers urged the Second Circuit Court of Appeals to hear its case, arguing that it “presents the single best opportunity to decide the fundamental legal question of how to treat the secondary trading of digital assets.”
“This case cries out for the Court’s immediate attention,” Coinbase’s lawyers wrote in their petition. “Whether secondary-market trading of digital assets falls within federal securities laws is a question of enormous importance to the crypto industry, consumers, financial institutions, and lower courts that need guidance. This case presents an ideal vehicle to address that question and provide clear rules for this multi-trillion dollar industry.”
Coinbase argued that crypto trading on its platform should not actually trigger federal securities laws because secondary crypto transactions do not meet all prongs of the Howey test, the long-standing legal framework used to decide whether what qualifies as an “investment contract.” Because buyers and sellers on Coinbase’s platform are matched in a blind bid-ask system and therefore do not know each other, there can be no common business between them, the filing said.
The exchange petition came two weeks after the Southern District of New York (SDNY) issued a rare stay in the US Securities and Exchange Commission (SEC) case against Coinbase, allowing Coinbase to appeal to a higher court for clarity.
The The SEC sued Coinbase in June 2023 for allegedly acting as an unregistered securities exchange, broker and clearing agency. When Coinbase tried to dismiss the lawsuit, the district court judge overseeing the case denied its motion, finding that the SEC had made a “plausible” argument that the exchange violated federal security law. On January 7, however, the judge referred the question to a higher court, writing that “conflicting decisions on important legal issues require the guidance of the Second Circuit.”
The SEC’s case against Coinbase will be put on pause while the exchange seeks answers from the Second Circuit.
On the same day that Coinbase’s petition was filed, the SEC – now under the leadership of Republican Acting Chair Mark Uyeda – announced the formation of a crypto task force led by crypto-friendly Commissioner Hester Peirce. The move signals a shift away from the agency’s “regulation by enforcement” approach to crypto under former Chairman Gary Gensler.
“To date, the SEC has relied primarily on enforcement actions to regulate crypto retroactively and reactively, often using untested legal interpretations along the way,” the SEC said in a statement. “Clarity about who should register and practical solutions for those who wish to register, have been elusive. The result is confusion about what is legal, creating an environment that is hostile to innovation and conducive to fraud . The SEC can do better.”
