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Coinbase Lawsuit: Federal Judge Blasts SEC During First Oral Arguments

SEC Issues Wells Notice Against Coinbase for Listing Unregistered Securities

The first round of oral arguments between Coinbase and U.S. regulators during their major legal war has come to a close.

The result? No immediate rulings – but the judge overseeing the case found herself impressed with Coinbase’s understanding of the issues and technologies at hand.

Coinbase VS SEC on Staking

Judge Katherine Polk Failla began Wednesday’s hearing by crediting the “DeFi people” for filing a “really fine” amicus brief on behalf of Coinbase months ago, which explained blockchain staking “arguably better” than the Securities and Exchange Commission (SEC) had previously done.

In its August amicus, the DeFi education fund argued that Coinbase’s staking as a service product does not qualify as an unregistered security – one of the SEC’s core allegations from its 100-page lawsuit against the crypto exchange last June.

It explained that Coinbase’s role in staking provision was “purely ministerial” and akin to an IT service provider. Thus, it doesn’t meet the four prongs of the Howey Test – the SEC’s near-century-old legal standard for identifying investment contracts.

Coinbase and other crypto industry leaders often argue that the Howey Test is an outdated standard with which to govern the crypto industry.

Is ‘Howey’ Outdated?

Judge Failla referenced such arguments during questioning, asking the SEC’s lawyer why she shouldn’t consider similar arguments from Cynthia Lummis – a crypto-supportive Republican senator.

“She’s not just a random Senator, she’s someone deeply involved in the space. Why is she wrong?” asked the Judge.

Paraphrasing Lummis’s position on the Howey Test, Failla added:

“We’ve had a good run. We’ve had 90 years where these securities laws have been able to apply to these markets. But now we have something new.”

Broadly speaking, Coinbase spent the five-hour hearing arguing that the SEC is using an overbroad interpretation of Howey and that none of the 12 tokens on Coinbase’s platform that the agency alleges are securities are as such. The company’s lawyer stated.

“I think there would have been a lot of surprise in the 1933/1934 Congress to find an investment contract didn’t have anything to do with a contract at all.”

According to Fox Business journalist Eleanor Terret on X, lawyers claim that Failla should take roughly 2 to 6 weeks to determine if the case should be dismissed, or enter deep legal water as with the agency’s 3.5-year lawsuit against Ripple Labs.