A federal judge has allowed Coinbase to pursue an interlocutory challenge in the Second Circuit Court of Appeals in its ongoing case with the U.S. Securities and Exchange Commission (SEC), citing conflicting rulings on crypto’s legal status.
Judge Katherine Failla granted the exchange’s appeal of her March 2024 order, which had denied the company’s motion for judgment.
A Big Legal Win for Coinbase
Paul Grewal, Coinbase’s chief legal officer, acknowledged the development in a January 7 X post:
“Over the strenuous objection of SEC, Judge Failla has granted our motion for leave to pursue an interlocutory appeal and stayed the district court litigation.”
Fox Business reporter Eleanor Terrett described the decision as “a big legal win for Coinbase,” explaining that the judge had granted a rare interlocutory appeal, permitting the exchange to challenge the SEC’s assertions in the Second Circuit Court of Appeals.
The Financial watchdog initially lodged its complaint against Coinbase on June 6, 2023, claiming that the company had failed to register as a broker, national securities exchange, or clearing agency while performing all three functions.
The lawsuit also alleged that it had violated securities laws by offering tokens such as SOL, ADA, and MATIC, which it argued are securities under the Howey Test.
In response, the exchange filed a motion in June 2023 seeking to dismiss the lawsuit, arguing that the tokens in question do not have the contractual obligations typical of securities and that its operations fall outside the SEC’s jurisdiction.
In response, the court partially granted and denied this motion in March 2024, pushing it to move for certification for an interlocutory appeal.
Conflicting Opinions
In her January 7 ruling, Judge Failla certified the order for appeal, stating that it involved a “controlling question of law” about the application of the Howey Test to crypto assets, an issue that involves several conflicting opinions. She noted that resolving this would help conclude the SEC’s enforcement action against Coinbase.
She also highlighted the unresolved issues from other high-profile cases involving the regulator, such as its actions against Ripple Labs. She explained that the decision in Ripple brought distinctions between token sales to institutional investors and retail buyers, an argument Coinbase has urged courts to adopt.
She also highlighted Coinbase’s argument that commodities have inherent value independent of their ecosystems. However, Failla rejected the platform’s narrower interpretation of Howey, emphasizing that the absence of formal contractual obligations does not exempt crypto assets from being securities if buyers reasonably expect profits from others’ efforts.
“There is indeed substantial ground to dispute how Howey is applied to crypto assets and the role of the surrounding digital ecosystem in that analysis,’’ read the document.
Failla acknowledged the uncertain legal landscape and wrote that the Howey Test’s application to digital ecosystems is a “difficult issue of first impression for the Second Circuit.”
