Coinbase could be poised for a win in its legal battle against federal regulators after just one hearing in court this week, according to legal experts familiar with the case.
On Friday, Bloomberg’s Senior Litigation Analyst Elliot Z. Stein tweeted that after hearing Coinbase’s oral arguments on Wednesday, he gives the crypto exchange a 70% likelihood of securing victory in its motion to dismiss all claims made against it by the U.S. Securities and Exchange Commission (SEC).
“Coinbase is likely to win this motion, we think,” Stein wrote in a research note published to Twitter (aka X).
Filed in June, the company’s motion claimed that none of the tokens named in the SEC’s lawsuit against it earlier that month meet the definition of an investment contract. By extension, they cannot be considered securities, nor can Coinbase be called an unregistered securities exchange.
Stein highlighted how Judge Katherine Polk Failla wanted the SEC to provide a definition of “investment contract” that wouldn’t ultimately encompass innocuous collectible items—such as Beanie Babies.
By contrast, he found Coinbase’s definition much more compelling—one that would require crypto investors to purchase a stake in a “business” rather than just an ecosystem. By this standard, both crypto sales on Coinbase’s platform and its staking-as-a-service business would fall outside the SEC’s purview.
“Even if the case survives, it likely reaches the Supreme Court, which we think will narrow Howey,” Stein added.
The Howey Test is a legal standard established in the 1940s for identifying investment contracts.
The test requires that an asset meet four prongs to be considered as such: 1) an investment of money; 2) in a common enterprise; 3) with an expectation of profits; 4) based on the efforts of others.
“Under Howey, the SEC can regulate collectibles. It’s just chosen not to,” argued University of Kentucky law professor Brian L. Frye, in conversation with Decrypt.
A piece of art, for example, may be bought with an expectation of profit based on the efforts of the producer increasing the value of the brand it’s associated with. This would theoretically tick every box of the Howey Test, making the art sale a securities transaction.
Frye agreed that the district court is likely to side with Coinbase on this matter, but said that it may have difficulty articulating why. He also predicted that the SEC will appeal the case, taking it to the circuit court.
“I think Coinbase has to provide a theory of what the SEC can and can’t regulate, and that theory can’t just consist of, ‘The SEC can’t regulate collectibles,’” he said.
Joe Carlasare, partner at the Amundsen Davis law firm, was much more pessimistic about Coinbase’s chances of a perfect outcome.
“I think outright dismissal of all claims is less than 30% [likely],” he told Decrypt. While Coinbase’s arguments were persuasive, and the exchange will likely win in some areas, winning dismissal of all claims in a motion to dismiss is simply against the odds.
“Under a motion to dismiss, the complaint must be liberally construed in the plaintiff’s favor, and all facts pleaded in the complaint must be taken as true,” he said.
“Coinbase must prove effectively that all of the SEC’s claims are legally insufficient,” Carlasare added. “That’s a hefty burden.”
The SEC already lost two major crypto showdowns last year, including as prosecutors against Ripple Labs and as defendants against Grayscale. The latter verdict opened the door for last week’s approval of spot Bitcoin ETFs in the United States.
Edited by Andrew Hayward