April 19, 2024
Policy & Regulation

Coinbase’s Legal Defense Against SEC Complicates After District Judge’s Critique of Ripple Ruling

Following a US District Court’s ruling on July 13 that Ripple Labs did not violate securities laws when selling its XRP token on crypto exchanges, Coinbase (COIN) shares have shown strong performance, outperforming the market. However, a subsequent ruling by another judge from the same district has raised concerns, as reported in a research note by investment bank Berenberg on Tuesday, August 1.

The rejection of the Ripple ruling was made by US District Judge Jed Rakoff of the Southern District of New York. He disagreed with Judge Torres’ differentiation between institutional sales and sales to retail investors on crypto exchanges, arguing that it was a misinterpretation of the Howey test—a method used to determine whether an asset qualifies as a security. According to the research report led by Mark Palmer, Judge Rakoff’s rejection could complicate Coinbase’s reliance on the previous ruling in its ongoing case against the SEC. The Judge explicitly stated that the Howey test “makes no distinction between purchasers.”

The Howey Test, a significant aspect of the US Supreme Court case, is used to ascertain whether a transaction is an investment contract. If it is classified as such, the transaction is considered a security.

Another defense that Coinbase employs in its case against the SEC is the “major questions doctrine,” which prevents agencies from exceeding their designated scope based on a Supreme Court ruling. However, the report reveals that Judge Rakoff rejected Terraform Labs’ use of this doctrine in their defense, potentially impacting Coinbase’s defense strategy.

Despite these developments, Berenberg maintains its “hold” rating on Coinbase shares, setting a price target of $39. The bank believes that the stock is “uninvestable” in the near term. On Tuesday, Coinbase shares experienced an 8% decline in early trading, reaching $90.85. Nonetheless, the stock has shown an impressive 155% increase so far this year. The crypto exchange is scheduled to report its second-quarter earnings after the market closes on Thursday.


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