Coinbase Global (COIN) asked a US judge to dismiss a lawsuit from the Securities and Exchange Commission, arguing that the cryptocurrencies sold through its exchange are more like baseball cards than investment securities.
"Our core argument is simple — we do not offer 'investment contracts' as that term has been construed by decades of Supreme Court and other binding precedent," Coinbase chief legal officer Paul Grewal said in a post on X, formerly Twitter.
Today, @coinbase filed our brief asking the Court to dismiss the SEC’s case against us. Our core argument is simple — we do not offer "investment contracts" as that term has been construed by decades of Supreme Court and other binding precedent. 1/3 https://t.co/r2EkDgkEuc
— paulgrewal.eth (@iampaulgrewal) August 4, 2023
The filing on Friday came one day after the largest US crypto exchange reported that revenue earned from trading fees fell to its lowest level in nearly three years.
The SEC filed its lawsuit against Coinbase in June, alleging it was an unregistered exchange because Coinbase allowed the sale of certain crypto tokens the agency considers to be securities — and therefore part of the SEC's jurisdiction.
The question of what constitutes a security is key in this case as well as a larger legal campaign by the SEC to crack down on the cryptocurrency industry.
The regulator made a similar argument about securities in a separate suit against Binance, the world's largest cryptocurrency exchange, arguing that Binance also allowed certain digital currencies to be traded on its platform that should have been registered with the SEC.
Since the beginning of 2023, the SEC has charged 17 different crypto actors with violating securities laws.
The SEC's framework for evaluating digital assets as securities relies on the "Howey test." This test has its origins in a 1946 Supreme Court case dealing with tracts of Florida orange groves sold by W.J. Howey Co. and leased back to the company.
The Supreme Court labeled these leaseback deals as investment contracts, meaning they needed to be registered with the SEC.
It also defined what constituted a security: "an investment of money in a common enterprise with profits to come solely from the efforts of others."
Coinbase argued in its new filing Friday that the digital currencies sold on its platform are akin to baseball cards that are bought and sold on the open market by people who hope the cards will appreciate in value. Such cards are a commodity, not a security, it argued.
"That remains true even if the company makes representations about plans to create a premier card trading platform, to drive up the value of the cards it sells. Those representations can’t turn baseball cards into securities. Baseball cards are not “shares in the [baseball card] enterprise."
On Coinbase's secondary-market exchange, it added, "There is no investment of money coupled with a promise of future delivery of anything. There is an asset sale. That’s it. It is akin to the sale of a parcel of land, the value of which may fluctuate after the sale. Or a condo in a new development. Or an American Girl Doll, or a Beanie Baby, or a baseball card."
The courts thus far have not yet been clear on how digital currencies should be treated.
Analisa Torres, a US judge in the Southern District of New York, said on July 13 that a digital token issued by Ripple Labs was a security only when it was sold to institutional investors, and not when it was purchased by the general public. The SEC had also sued Ripple for selling unregistered securities.
Then July 31, US judge Jed Rakoff disagreed with that specific view in his case, in which the SEC has alleged stablecoin issuer Terraform Labs sold unregistered securities.
He determined that how a crypto token is sold — whether through an exchange or directly to institutional investors — does not determine whether any reasonable investor would expect the promise of profits.
Where both judges agreed was that the crypto asset in their specific cases weren’t inherently securities.
"It makes the SEC's job a lot more challenging," said Daniel Stabile, a legal partner with law firm Winston & Strawn, which represents both Ripple Labs and Binance in other legal matters. But the recent court decisions also don't get Coinbase off the hook entirely, he added.
“We do think we can win," Coinbase's Grewal said during the company's second quarter earnings conference call on Thursday.
"We expect to win. But it's important to understand that our goal across not just the litigation but all of our efforts engaging with the SEC and engaging with the US government as a whole is to achieve regulatory clarity."
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