The legal battle between Coinbase and the SEC continues.
The SEC lit the fuse when it sent Coinbase a Notice of Investigation in March.
The company later sued the SEC for failing to say what rules should be applied to the crypto sector and therefore respected.
Today, Coinbase’s chief legal officer, Paul Grewal, said the Third Circuit had issued an order directing the SEC to file a response to the 2022 petition within 10 days.
Coinbase files petition with SEC
In July last year, Coinbase sent a petition to the SEC asking what rules should be adopted to regulate securities offered and traded through “digital native methods”.
The SEC never responded, leaving the exchange to continue operating without any certainty as to what specific rules it would have to comply with.
For this reason, after receiving notice of the investigation, the company decided to sue the agency for failing to respond to its petition.
Now the US Court of Appeals for the Third Circuit has ruled in Coinbase’s favour, ordering the SEC to provide an answer to the exchange‘s legitimate question.
The question of security: Coinbase vs. SEC
The fundamental issue from which such problems arise is the nature of cryptocurrencies.
While there are no particular problems with those that are considered commodities, such as Bitcoin, there are some unresolved issues with those that are considered securities.
In particular, US law, like that of many other countries, allows the sale of securities only if they have been registered (and therefore approved) by the authority that oversees the financial markets. In the US, this is the Securities and Exchange Commission (SEC).
The SEC is therefore the authority that must intervene in such cases, so it is not clear why it has refused to respond to Coinbase. With this in mind, it is easy to understand the court’s decision to order the agency to answer the exchange’s legitimate questions.
If the answer is that the same rules that apply to traditional markets must be applied, then all cryptocurrencies that are declared to be unregistered securities should be removed from the market.
To date, there are no first- or second-tier cryptocurrencies reported to be registered with the SEC as securities, so there is a risk that any that are deemed to be would have to be temporarily delisted.
Furthermore, it is difficult to imagine that the SEC would accept the registration of many cryptocurrencies as securities, so in many cases delisting could be permanent.
Which cryptocurrencies are securities?
Apart from Btcoin, which is definitely not a security, and the very few tokens that have already been declared securities, the question arises for all other cryptocurrencies.
According to the current chairman of the SEC, Gary Gensler, all cryptocurrencies would be securities except for bitcoin.
Some of them, such as Ripple’s XRP, have already been the subject of an inconclusive SEC investigation.
For many cryptocurrencies and tokens, the problem may be that they are backed by a centralised issuer that launched them with the promise of profits: in these cases, it is objectively difficult to argue that they are not securities.
For projects such as Ethereum, Cardano, Litecoin and Monero, i.e. decentralised projects whose tokens have not been sold with the promise of profits, the problem is still open.
In these cases, however, there are those who believe that the stakes can be interpreted as an investment contract, which would make them a security.
As you can see, the issue is still largely unresolved, chaotic and not at all clear. In such a scenario, it seems rather logical that Coinbase has asked the SEC for clarification, while it seems not at all logical that the SEC refuses to answer.
Who decides if a crypto is a security?
Digging deeper, the key issue is who should decide whether a particular cryptocurrency should be considered a security or not.
The SEC vs. Ripple case seems to indicate that it should be a court that decides, and that it should decide specifically on the individual cryptocurrency, not in a general way.
On the other hand, the so-called Howey test is used to decide whether a transaction is an investment contract, i.e. a security, or not, a test that refers to the 1946 US Supreme Court case between the SEC and WJ Howey Company.
According to this test, an investment contract exists if there is:
“An investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others“.
So the Supreme Court seems to have the final say on the matter, but it has yet to rule on cryptocurrencies.
Sooner or later, we may have to wait for that court to rule on every single cryptocurrency to determine which ones are securities and which ones are not.