SEC Rebuts Coinbase's Attempt to Get Appeals Court to Answer Key Crypto Question

U.S. regulators said an appeals court shouldn't heed Coinbase's request to review how – or if – conventional securities rules apply to cryptocurrencies.

Coinbase, the largest U.S. crypto exchange, filed for permission to ask the Second Circuit Court of Appeals if the Howey Test, a longstanding Supreme Court assessment for securities, should apply to digital assets. Coinbase hopes it doesn't.

Coinbase hasn't successfully argued this is needed, the U.S. Securities and Exchange Commission said Friday.

The question lurks at the center of the SEC's accusation that Coinbase operates as an unregistered broker, exchange and clearinghouse in the U.S. If some cryptocurrencies are securities – thus meeting the Howey Test – that means Coinbase needed to get the SEC's blessing before letting customers trade them, according to regulators.

In its filing, the SEC argued that Coinbase was trying to create a "new legal test" for how crypto might fit into existing securities precedent that a district court judge had already rejected.

"Coinbase remains unable to advance a single, coherent version of this theory, which it now claims presents a controlling question," the filing said. "This is unsurprising – in eighty years 'no court' has ever required post-sale 'contractual undertakings' or anything beyond the three factors expressly enumerated by the Supreme Court in Howey."

The filing went on to argue that Coinbase hadn't successfully argued that there was a "controlling question" in its filing.

The SEC also argued that while Coinbase's appeal says it's focusing on a specific legal question about "contractual obligations," its actual argument about the application of Howey to crypto is an entirely different question altogether.

"Similarly, attempting to meet the 'precedential value for a number of cases' factor, Coinbase again pivots away from the 'contractual obligations' question, this time into '[h]ow Howey applies to secondary-market crypto transactions,'" the filing said.

Judge Katherine Polk Failla, who's overseeing the SEC's case against Coinbase, will have to rule on the motion for interlocutory appeal. If she sides with Coinbase, the exchange will be able to send the motion to the actual appeals court.