March 28, 2024
Regulators Resist Crypto Favoritism in Coinbase Case
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Regulators Resist Crypto Favoritism in Coinbase Case

The North American Securities Administrators Association (NASAA) has filed a document in the United States District Court for the Southern District of New York, expressing its support for the U.S. Securities and Exchange Commission (SEC) in the ongoing legal battle against Coinbase. In June, the SEC initiated a lawsuit against Coinbase, alleging that the publicly traded cryptocurrency exchange had violated federal securities laws. Coinbase countered by asserting that the digital assets and services it offered did not fall under the category of securities and that the SEC was overstepping its boundaries.

NASAA’s general counsel, Vincente Martinez, contended that the SEC’s stance is not a novel or extraordinary interpretation of securities regulations. According to Martinez:

“The SEC’s theory in this case is consistent with the agency’s longstanding public position […] It is also well within the bounds of established law.”

One key aspect of the lawsuit centers on the judge’s interpretation of the Howey test, a standard used to determine what qualifies as an investment contract. Coinbase has argued that digital assets do not meet all the criteria of the test. Martinez asserted that the Howey test was designed to be flexible enough to encompass various technological advancements in the securities markets, including securities bought and sold on blockchains. This mirrors arguments previously presented by the SEC. Martinez emphasized that the court should reject Coinbase’s attempt to narrow and misapply the established legal framework to evade the same regulatory obligations as other participants in the nation’s securities markets. He added, “The Court should decline to treat digital assets as somehow special.”

Martinez also criticized Coinbase’s reliance on the “major questions doctrine,” which asserts that executive agencies like the SEC require congressional approval for matters of significant political or economic importance. Martinez disputed Coinbase’s characterization of the “digital asset industry” as a significant portion of the American economy, contending that most digital assets are primarily used for speculation and lack practical economic utility, including the ability to pay for goods, services, or government obligations.

He stated, “With very few exceptions, digital assets are not widely accepted to pay for goods or services, nor can they be used to satisfy obligations to the government such as fees or taxes.” According to Martinez, digital assets, as a class of assets, lack economic utility, and Coinbase has exaggerated the size and significance of the “industry,” particularly concerning the portion overseen by securities regulators.

NASAA’s submission aligned with the SEC’s request for the judge to reject Coinbase’s attempt to dismiss the SEC lawsuit. NASAA is composed of 68 members, including securities regulators from all 50 U.S. states, as well as securities regulators in Canada, Mexico, and several U.S. territories. Martinez emphasized that NASAA and its members have a substantial interest in the case.

Image by vector4stock on Freepik

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