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Judge Katherine Polk Failla of the Southern District of New York heard arguments in a five-hour hearing Wednesday afternoon in a case that could determine the regulatory future of the $1.7 trillion cryptocurrency industry. did.
Lawyers for Coinbase, the largest U.S. cryptocurrency exchange, have filed an SEC complaint alleging that the largest U.S. cryptocurrency exchange also violated securities laws by operating as an “unregistered broker-dealer” by buying and selling unregistered digital assets. They argued that the lawsuit should be dismissed by the court.
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Wall Street's top official, the SEC, fires Coinbase because the agency believes it clearly violated securities laws and discovery for a future trial should begin immediately. She asked for a ruling denying the claim.
Bitcoin soared 10% amid the Silicon Valley Bank collapse. ((Photo credit: KAREN BLEIER/AFP via Getty Images) / Getty Images)
Legal experts say it could take two to six weeks for Failla to make a decision. If the lawsuit progresses, its outcome could set an important precedent for U.S. cryptocurrency regulation.
If the court sides with Coinbase, it could significantly thwart SEC Chairman Gary Gensler's attempts to regulate crypto businesses through various enforcement actions. Since becoming chairman, Gensler has brought more than 50 cryptocurrency enforcement actions for various regulatory violations. The SEC's victory against Coinbase allows Gensler to continue pursuing its agenda.
The SEC lawsuit alleges that the company is operating as an unregistered broker, exchange, and clearing house by offering 13 tokens that the SEC considers to be “securities,” similar to stocks and bonds. It claims that it is necessary to register with the same organization.
Coinbase maintains that tokens sold on its platform are not securities because there is no underlying investment contract between token issuers and users who purchase tokens on the secondary market.
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During his time at the SEC, Gensler said that most digital assets, except for Bitcoin and in some cases Ethereum, are considered valuable under the Howey Test, the Supreme Court's 1946 decision that determines whether a particular transaction qualifies as an investment contract. I have repeatedly stated that this falls under the category of securities. Doing so would require registering with the commission, which crypto companies have resisted given the industry's desire to remain outside of government control.
In this photo illustration taken on January 9, 2024 in Brussels, Belgium, the United States Securities and Exchange Commission seal is displayed on a smartphone with Bitcoin displayed on the screen in the background. (Photo illustration by Jonathan Raa/NurPhoto via Getty Images / Getty Images)
The cryptocurrency industry believes that many token offerings do not meet the Howie test requirements because there is no underlying contract between issuer and purchaser, a key requirement for meeting the test. He also believes that because the SEC is acting outside of its mandate, Congress should give jurisdiction to the Commodity Futures Trading Commission, which is known for being somewhat light on regulation.
Failla echoed industry concerns that the SEC is looking too broad when it comes to cryptocurrencies.
“I'm concerned that what you're asking for is a too broad definition of a security,” Failla said during Wednesday's hearing. “I am concerned about how the law develops in this case and what it means going forward.
The arguments in the Coinbase case are playing out both in Congress and in other lawsuits. In July, the cryptocurrency industry received a partial victory when U.S. Southern District Judge Torres ruled that the token XRP was not sold as an illegal security when traded between retail investors on exchanges. . He also ruled that cross-border payments company Ripple Labs was a security when it sold it to institutional investors to finance the construction of its platform.
The SEC said it intends to appeal Ripple's decision. In August, another Southern District Judge, Jed Rakoff, known as the dean of securities law scholars, sided with the SEC and ruled that Terraform Labs' LUNA and MIR tokens were indeed unregistered securities. did.
Coinbase and Ripple's claims that digital assets do not fit the parameters of the Howie test both demonstrate that the 80-year-old securities law, designed to regulate stocks, does not regulate modern technologies such as blockchain. It also raises questions about whether it is practical. And artificial intelligence.
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File photo: In this illustration taken on March 4, 2022, a representation of a cryptocurrency can be seen in front of the Coinbase logo. (Reuters/Dado Ruvic/Illustration/File Photo/Reuters Photo)
Congress is closely monitoring the regulatory debate.
Republican Sen. Cynthia Lummis of Wyoming said such enforcement action would hinder the development of the underlying technology for cryptocurrencies, known as blockchain, which has the potential to be transformative in reducing the cost of various transactions. , asked Feila to dismiss Coinbase's lawsuit.
Lummis has been a vocal advocate for cryptocurrencies and has introduced legislation in the Senate that would provide regulatory clarity for the industry. In the House, a handful of lawmakers, including Financial Services Committee Chairman Patrick McHenry, are also defending cryptocurrencies by introducing legislation that would establish so-called road rules.
U.S. Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler said in an interview with Bloomberg TV on Thursday, June 14, 2012, in New York, USA.New York financial firms will move jobs overseas if US grants loans to India (Scott Eales/Bloomberg via Getty Images/Getty Images)
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Coinbase is not the only incident that could have a significant impact on the SEC's ability to regulate cryptocurrencies. The Supreme Court is currently hearing arguments to overturn a 1984 precedent that said courts should follow authorities' reasonable interpretations of ambiguous statues. SCOTUS' conservative justices are expected to rule, overturning what has become known as the Chevron Doctrine. Doing so could significantly reduce the regulatory power of federal agencies such as the SEC and further limit Gensler's enforcement authority over the crypto industry.
