New York District Judge Katherine Polk Failla questioned the Securities and Exchange Commission in court on Wednesday, asking direct questions about what constitutes a security, staking and how the leading questions doctrine applies to the case.
Coinbase was sued by the regulator in June over the alleged allegations operating as an unregistered stock exchange, broker and clearing agency. Coinbase rejected those claims, arguing that this was the case fired and accusing the regulator of taking a “regulation through enforcement approach”.
Since its complaint in June, the SEC had alleged that tokens including SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO were securities.
In court Wednesday, Failla asked the SEC whether the token issuers named in the complaint were violating securities laws.
“Well, not exactly, Your Honor,” the agency lawyer said. The tokens cited in the complaint are computer codes, the lawyer added.
“I’m smiling, sir, because that’s pretty much what your friends at the back table are saying and wondering why we’re here,” Failla said.
Beanie Babies
Failla also asked the SEC how it defines securities, expressing concern that it may be too broad and broad in collectibles, such as Beanie Babies.
“I haven’t thought about Beanie Babies in decades, yet they are presented to me in multiple briefs,” Failla said.
“I really worry that your argument is too broad in scope,” Failla added. The SEC lawyer said they were not “arguing that collectibles are securities.”
Failla also shed light on his stance on not wanting to become an “activist judge,” mentioning that he had received a mandate from a U.S. senator, Sen. Cynthia Lummis, R-Wyo., who had called for the SEC’s case against Coinbase to be dismissed.
The Howey test was enacted with the intent of Congress and a legislature cannot ignore the will of Congress, the SEC lawyer said. “The leading questions doctrine is there to ensure that everyone stays in their lane,” the SEC lawyer continued.
The doctrine says that if an agency wants to decide on a matter of great national importance, it must be supported by clear authorization from Congress.
Bet
Failla also rejected the SEC’s claim that Coinbase engaged in an unregistered securities offering through its staking-as-a-service program.
Failla said he believes staking is “the least traditional investment of the features you were complaining about here.”
Judge Failla is now questioning Coinbase.
If the judge denies Coinbase’s motion, which is unlikely, then it will move to discovery. Once discovery is complete, both the SEC and Coinbase could file a motion for summary judgment.
If the judge is not convinced, then he will proceed to trial and be presented to a jury, but that probably won’t happen until 2025.
Uniswap Labs case
Fail fired in a class action lawsuit filed last year against Uniswap Labs, the Uniswap Foundation, and investors Paradigm, Andreessen Horowitz, and Union Square Ventures, refusing to “stretch” federal securities laws in that case, suggesting that such expansions are the domain of Congress.
Other judges have taken a direct stance in deciding whether the cryptocurrencies in question are securities or not.
New York District Court Judge Analisa Torres governed in July that some of Ripple’s XRP sales, called programmatic, did not violate securities laws due to a blind bidding process in place for them. It also ruled that other direct sales of the token to institutional investors were securities, handing the SEC a partial victory.
Judge Jed Rakoff of the United States District Court for the Southern District of New York side with the SEC last month alleging that Kwon and Terraform Labs were offering and selling unregistered securities. Rakoff granted summary judgment to the SEC on that request, also siding with Terraform “on requests involving the offering and effecting of transactions in security-based swaps,” according to a report order filed in December.
