A lawsuit between the U.S. Securities and Exchange Commission (SEC) and cryptocurrency exchange Coinbase has left a judge in a bind. The central question is whether tokens listed on exchanges should be considered securities.
According to US securities laws, if a token is considered a security, the issuer or trader must comply with regulatory requirements. It is required to register with the SEC and meet disclosure and reporting requirements.
Many tokens issued and traded do not meet the definition of traditional securities in the real world. The purpose of these tokens is generally to facilitate the financing and development of blockchain projects rather than to raise funds from the public. Therefore, over-considering these tokens as securities may have an unwanted impact on the cryptocurrency market.
In order to solve this problem, the judge needs to make a judgment based on weighing the interests of all parties. They must consider the SEC’s regulatory objectives and the importance of protecting investor interests, while also taking into account the unique and innovative nature of the cryptocurrency market.
The judge may adopt a compromise approach, and some tokens will be considered securities as long as they clearly meet the definition of a security. For other tokens, if they do not meet the definition of securities, or if they are issued and traded primarily for the financing and development of blockchain projects, they may not be considered securities.
Such a verdict will clarify the regulatory framework for the cryptocurrency market and provide certainty.
A judge in the U.S. District Court for the Southern District of New York is considering whether to dismiss a lawsuit filed by the U.S. Securities and Exchange Commission (SEC) against cryptocurrency exchange Coinbase. However, because the case involves many complex issues, the judge must first decide whether more than a dozen transactions on Coinbase are "securities."
The SEC and Coinbase both agreed during the court hearing on Wednesday (17th) that "the token itself" is not a security.
SEC lawyers argued that each transaction is equivalent to "an investor buying an ecosystem represented by a token." The buyer hopes to share its profits from the ecosystem, so as long as the "One of the transactions was deemed an investment contract," so Coinbase violated securities laws. However, the company stated that these were "secondary market transactions" and did not have the existence of contracts, so they could not be considered securities.
Coinbase is seeking to speak with Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York, asking her to dismiss the SEC’s illegal charges against Coinbase, even though the judge asked the SEC and Coinbase 14 pages of questions , challenging their position, but she did not make a decision at the table and did not reveal what kind of verdict she would take.
Katherine Polk Failla did not hint at a timetable, but expects a decision on whether the tokens are securities will have to be made within weeks. As a result, if it does not strengthen the SEC's actions against cryptocurrency platforms that are not registered as exchanges and handle unregistered securities, it will also undermine the SEC's efforts to combat the cryptocurrency industry and cause the SEC to suffer further legal defeats. In addition, in similar cases initiated by the SEC against Binance and Kraken, the judge’s views will also affect Judge Katherine Polk Failla’s views on the case.
SEC lawyer Patrick Costello said: "No matter who of us owns it (the token), it is the same computer code." He believes that no matter how the buyer obtains the digital asset, he has obtained a contract.
Tokens are the key to entering the ecosystem. Without an ecosystem, tokens have absolutely no value.
William Savitt, a lawyer appointed by Coinbase, argued that the "investment contract" defined by the Howey test actually requires the existence of contractual obligations between the token issuer and the buyer. "There must be a statement to convey an enforceable commitment. If Without this, it is not a contract of ownership.”
The judge was careful not to hint at his own views and only acknowledged one thing: "This is a difficult question."
SEC lawyer Patrick Costello also tried to refute the idea that the SEC's position may undermine securities The definition is expanded to collectibles such as art and trading cards on the grounds that these assets do not have a centralized ecosystem. "Collectibles have their own value, and there is no way for others to make a baseball card more valuable."
Judge Failla talked about two important decisions in which the SEC brought cryptocurrency-related cases, including the SEC’s loss in the Ripple case and its victory in the Terraform Labs case. She said that “I am not surprised” when Judge Jed Rakoff in the Terraform case ruled that crypto asset transactions were securities, but that this did not involve tokens traded in the secondary market, which shows the difference between that case and this case.
Cryptocurrency industry insiders welcomed the judge’s apparent skepticism of the SEC’s views at the hearing. For example, Justin Slaughter, policy director at Paradigm, said: "The SEC's claims were obviously highly questionable throughout the hearing process."
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