Coinbase Petitions to Clarify SEC's Stance on Crypto Assets

Coinbase is seeking to unravel the legal deadlock at the center of the crypto industry's fight with the U.S. Securities and Exchange Commission (SEC), filing a petition for an interlocutory appeal Friday that would ask a higher federal court to weigh in on the regulator's core views of digital assets, even as the SEC's broader case proceeds through the court system. The U.S. exchange filed the petition for interlocutory appeal to tee up a legal disagreement it wants to see reviewed, in this case by the U.S. Court of Appeals for the Second Circuit. A federal judge recently dismissed Coinbase's attempt to throw the SEC's case against it out before trial and now Coinbase is formally asking the court to consider whether the SEC can deem a digital asset transaction to be an investment contract if it is not connected to any ongoing obligation from the asset's original issuer.

Coinbase Seeking to Untangle Legal Limbo with SEC

Coinbase is seeking to break a regulatory impasse at the heart of the cryptocurrency industry's battle with the U.S. Securities and Exchange Commission (SEC), filing an interlocutory appeal Friday that would ask a higher federal court to weigh in on the agency's core views on digital assets, even as the SEC's broader case against the company proceeds through the court system.

The U.S. exchange filed the interlocutory appeal to tee up a legal disagreement and seek review of that issue – in this instance, whether the SEC can deem a digital asset transaction an investment contract if it is not connected to any ongoing obligations from the asset's initial issuer – by the U.S. Court of Appeals for the Second Circuit. A federal judge recently rejected Coinbase's bid to dismiss the SEC's lawsuit against the company before trial, and now Coinbase is formally asking the court to consider whether the SEC can deem a digital asset transaction a security if it is not connected to any ongoing obligations from the asset's initial issuer.

Coinbase argues in its appellate filing that the SEC's application of the so-called Howey test to crypto assets has left a "murky understanding" of what constitutes a security.

"Applying Howey to digital asset transactions raises difficult questions," Coinbase argues.

"That members of Congress, the Senate, and regulators have been divided in how they answer them demonstrates the difficulty of the issue, and the varied judicial outcomes illustrate that divide."

Such appeals are often long shots, as the SEC found out when it made a similar request in its own case against Ripple, which was denied.

But if this appeal is granted, the question could bring the industry one step closer to what could eventually be a U.S. Supreme Court ruling to settle the matter once and for all.

When asked for comment on the appeal effort, an SEC spokesperson said that "any response will be on the public record filed with the court."

Investment contracts are securities regulated by the SEC, so if crypto transactions qualify then they would fall under the agency's purview and need to be properly registered under the law.

The regulator has argued before lawmakers and in courts that the vast majority of digital assets are securities, but Coinbase and others in the industry argue that once those assets hit secondary markets and are no longer connected to the firm that issued them, the tokens fall outside the SEC's legal reach.

Resolving this dispute will shape the U.S. crypto landscape.

Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York ruled last month that the SEC had sufficiently demonstrated its legal footing in its allegations against Coinbase that the court would allow the bulk of the case to proceed.

Coinbase's new appeal of one part of that decision would need to be accepted by Judge Failla and by the Second Circuit in order to go forward.

If they do, the rest of the case would continue in Failla's court as the regulator and the company head toward trial.

Coinbase's case is seen as one of the more consequential legal battles that could shape how the U.S. approaches the industry.

To date, the SEC has had a mixed record of late – suffering some high-profile losses (such as the one to Ripple) and notching some significant wins (such as its case against Terraform Labs and an insider-trading case connected to Coinbase).

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