SEC v. Coinbase: Judge Questions SEC’s Ability to Protect Investors

Judge Katherine Polk Faila of the U.S. District Court for the Southern District of New York recently held a pre-motion conference regarding the Securities and Exchange Commission’s (SEC) lawsuit against Coinbase.

In their lawsuit filed in early June 2023, the regulator claims Coinbase violated securities laws by listing certain digital assets on its platform that they deem as securities.

Coinbase versus SEC Pre-motion Conference

However, during the conference on July 13, Judge Faila questioned the SEC’s ability to safeguard United States investors engaged in crypto. Specifically, she expressed concern that the SEC’s definition of a security might be “too extensive,” potentially leading to many digital assets being classified as securities. 

The Judge also inquired about how the SEC intends to effectively communicate its definition of a security to the public, given the ambiguity of the Howey test, which the SEC employs to determine whether a digital asset qualifies as a security.

In a transcription, she stated:

What is the difference between those that are not [securities] and those that are? And how has that been communicated by the SEC to the investing public and to those involved in the space so that they know that this type of asset may implicate the securities laws and some other cryptoasset may not?

While replying to the judge, the SEC lawyer asserted that those interested to know more should read the “1946 Howey case about the orange groves”.

In response, the Judge said she only wanted to “figure out how folks involved in the industry can know that a particular crypto-asset with which they are involved is or is not going to be found at some later date by the SEC to be a security.”

SEC On The Spotlight

Even so, the case against the exchange is still nascent, but the crypto community is closely monitors how it unfolds.

Eventually, its ruling will likely impact trading and how exchanges list crypto assets, including some like ADA, the native currency of the Cardano network, that the agency claims is an unregistered security.

Amid this, Judge Faila’s skepticism regarding the SEC’s approach to investor protection in crypto, reading from the transcriptions, is showing. Critiques of the SEC’s approach to regulating crypto have been voiced, with some arguing that the SEC’s enforcement actions are overly aggressive. 

Others contend that the SEC should take more decisive measures to safeguard investors. The SEC’s broad definition of a security has led to concerns that it could encompass various digital assets, potentially hindering innovation within the industry. 

Criticism has been directed at the need for more clarity in the SEC’s regulations, as its reliance on the Howey Test criteria has been subject to differing interpretations, causing uncertainty in the broader crypto space.