SEC says its small legal win carries weight in colossal Coinbase case. Some lawyers disagree.

Quick Take

  • SEC cites California ruling to argue tokens on Coinbase are securities.
  • The ongoing debate: are cryptocurrencies securities?
  • Summary judgments may not set precedents, lawyers tell the Block.

The Securities and Exchange Commission is determined to secure a decisive win in its lawsuit against Coinbase, filed in a New York federal court. To do so, it is trying to leverage a recent ruling on a separate case from a court in California, thousands of miles from its current legal battle.

But the regulator’s legal strategy, lawyers told The Block, may not be a winning one. 

“To say that… there's case law saying crypto assets are securities based on [the insider trading case] is a little aggressive,” Terrence Yang, a lawyer and managing director at Swan Bitcoin, told The Block.

Last June, the SEC sued Coinbase, accusing it of breaking federal securities laws by offering unregistered securities in the form of digital tokens. The lawsuit is the latest in a string of complaints the agency has brought against crypto companies as it attempts to expand its regulatory power over the digital assets industry — a move that crypto professionals say would stifle innovation in the burgeoning industry, driving crucial technological advancements and funding opportunities overseas.  

Judge Katherine Polk Failla of the Southern District of New York will soon issue a ruling on the tokens-as-securities issue in the current court battle between Coinbase and the SEC. The decision may answer a major question in the regulatory debate: Should cryptocurrencies be classified as securities, thus falling under the SEC's purview?

SEC using the Wahi order

To support its view, the SEC this week made a new play to answer that question, leveraging a judge’s judgment in a separate, but tangential, case.

In a letter to the court filed on Monday, the SEC asks Judge Failla to consider a ruling issued last Friday by Judge Tana Lin of Seattle in a separate insider-trading case involving an ex-Coinbase employee, Ishan Wahi, who used his privileged knowledge of the exchange to help his brother, Nikhil Wahi, and friend, Sameer Ramani, make highly lucrative trades on the platform. According to that judgment, known as the Wahi order, “tokens… traded [by defendants of the insider-trading case] were offered and sold as investment contracts and, thus, were securities.”

The ruling came in the form of a summary judgement, a decision issued by a judge at the SEC's request after one of the defendants, Wahi, failed to show up to court. 

'Limited' value

Coinbase on Tuesday hit back against the circumstances under which a judge issued the decision, however, arguing the Wahi order “should be afforded no weight" in a letter to Judge Failla. 

“The Wahi order was procured against an empty chair and its reasoning reflects as much,” the company’s lawyers said in the letter. 

Teresa Goody Guillén, a partner at BakerHostetler law firm, also asserts the weight the insider trading case carries in the SEC’s larger lawsuit against Coinbase should be modest at most.  

“The value or the implication is pretty limited because it was a default judgment,” Guillén said.


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© 2024 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

About Author

Elizabeth Napolitano is a data reporter covering business and technology news, with a focus on cryptocurrencies. Prior to joining The Block, Elizabeth reported on BigTech, AI, crypto and videogames for CBS Moneywatch. As a CoinDesk reporter, she covered DeFi, NFTs and U.S. courts. She holds an MA in Journalism from CUNY. Follow her on X: @LizKNapolitano

Editor

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