The initial round of oral arguments in the legal battle between Coinbase and U.S. regulators has concluded, with no immediate rulings. However, Judge Katherine Polk Failla, presiding over the case, expressed her appreciation for Coinbase’s grasp of the issues and technologies involved.
Coinbase vs. SEC on Staking
Judge Katherine Polk Failla commenced the hearing by acknowledging the “DeFi people” for submitting an amicus brief on behalf of Coinbase several months ago. She found their explanation of blockchain staking to be “arguably better” than what the Securities and Exchange Commission (SEC) had previously presented.
In the amicus brief from August, the DeFi education fund argued that Coinbase’s staking service should not be considered an unregistered security, a core allegation in the SEC’s lawsuit against the crypto exchange. They asserted that Coinbase’s role in staking was purely ministerial, akin to an IT service provider, and therefore did not meet the four criteria of the Howey Test, an almost century-old legal standard used by the SEC to identify investment contracts.
Coinbase and other leaders in the crypto industry often argue that the Howey Test is outdated for regulating the crypto space.
Is the ‘Howey Test’ Outdated?
Judge Failla referred to such arguments during the proceedings, questioning the SEC’s attorney about why she shouldn’t consider similar arguments made by Cynthia Lummis, a crypto-supportive Republican senator. She emphasized Lummis’s deep involvement in the crypto space and paraphrased her stance on the Howey Test, suggesting that after 90 years, the traditional securities laws may not apply as effectively to these new markets.
In general, Coinbase contended during the five-hour hearing that the SEC’s interpretation of Howey was overly broad and that none of the 12 tokens on Coinbase’s platform, which the agency alleges are securities, actually meet that criteria. Coinbase’s lawyer argued that it would have been surprising for the Congress of 1933/1934 to consider an investment contract as having nothing to do with an actual contract.
According to Fox Business journalist Eleanor Terret on X, legal experts anticipate that Judge Failla will take approximately 2 to 6 weeks to decide whether the case should be dismissed or proceed further, similar to the SEC’s 3.5-year lawsuit against Ripple Labs.