Coinbase Appeals SEC Decision on Classification of Digital Asset Investment Contracts

Coinbase’s Chief Legal Officer, Paul Grewal, announced today in a post on X that Coinbase has filed a motion to appeal a decision made by a judge last month. This decision allowed the U.S. Securities and Exchange Commission (SEC) to proceed with its lawsuit against them. If the appeal is approved, the Second Circuit Court of Appeals will have the authority to review the SEC’s classification of certain digital asset transactions as investment contracts, potentially pausing the ongoing litigation.

Today, @Coinbase submitted a brief requesting the court to allow an interlocutory appeal on the following control issue in our @SECGov case: whether “investment contracts” require contractual content – we believe they do, but the SEC disagrees.

Coinbase’s motion focuses on whether digital asset purchases comply with the SEC’s rules regarding “investment contracts.” This resolution will have far-reaching implications for the entire digital asset industry. The company seeks a definitive ruling from the higher courts to end the uncertainty.

According to Coinbase, the definition of investment contracts includes the necessity of post-sale obligations, a standard upheld by both the Supreme Court and the Second Circuit Court of Appeals for nearly a century. Nevertheless, the U.S. Securities and Exchange Commission actively seeks new interpretations, suggesting that merely integrating digital assets into token ecosystems can constitute investment contracts.

In the 90 years since the enactment of federal securities laws, neither the Supreme Court nor the Second Circuit Court of Appeals has found an investment contract lacking post-sale obligations. However, in a recent series of enforcement actions targeting the digital asset industry, the SEC has put forth a theory that such obligations are not necessary. “Coinbase’s legal defense argues,” the company states.

Coinbase points out that this approach has sparked widespread debate among legislators, regulators, and industry participants. Even SEC commissioners acknowledge that regulatory uncertainty plagues the cryptocurrency industry. The company believes that the SEC’s broad interpretation is introducing uncertainty into an industry experiencing exponential growth and economic influence.

Coinbase’s legal defense challenges the SEC’s assertion, claiming that the relevant transactions lack traditional elements of investment contracts. The company asserts that the Second Circuit Court of Appeals’ appeal is an appropriate tool to provide urgently needed guidance on this critical legal issue.

“The application of Howey to digital asset transactions presents a thorny issue. Disagreements among members of Congress, senators, and regulatory bodies demonstrate the difficulty of this question, and the divergence in judicial outcomes underscores it. Given these divergences, the ‘cloud of legal uncertainty’ has hung over the digital asset industry,” Coinbase’s legal defense contends. “This case provides the Second Circuit Court of Appeals with an ideal tool to swiftly and thoroughly dispel it.”

Today’s motion comes after the U.S. court recently rejected Coinbase’s appeal in the SEC’s lawsuit filed last year. While Judge Failla found the SEC’s evidence sufficient to require Coinbase to register as an exchange, broker, and clearing agency, she did side with Coinbase on the separate issuance issue related to wallet products, deeming it unrelated to the SEC’s securities allegations.

Following the court’s dismissal of the lawsuit, Grewal stated that Coinbase will continue its legal battle with the SEC.

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