On Wednesday, in a highly anticipated legal showdown, lawyers for Coinbase and the US Securities and Exchange Commission (SEC) squared off in a Manhattan courtroom.
The attorneys were arguing about whether the lawsuit filed by the securities regulator against the crypto exchange should be dismissed or not.
The hearing
The lawsuit had been filed by the federal regulator last June in which it accused the crypto exchange of operating illegally, thereby violating the securities laws.
The hearing went on for a period of five hours during which US District Judge Katherine Polk Failla questioned both sides about the merits of their respective arguments.
She seemed particularly willing to question the claims of the SEC that the existing securities laws can be applicable so easily to the novel crypto industry.
Judge Failla warned an SEC lawyer that she was concerned that their argument was sweeping just too broadly.
She outlined a hypothetical scenario in which a ruling in favor of the securities regulator would open up the door to class action lawsuits.
She asked how it was possible to determine that other commodities and collectibles would not be implicated in the test.
The response
In one lively exchange, the SEC lawyer tried convincing the judge that she should not pay heed to the brief filed by Senator Cynthia Lewis in favor of Coinbase. She is known as a popular crypto advocate.
The warning did not convince the judge and she even implied that the attorney was not showing the proper deference when referring to the politician.
Speaking to the SEC counsel, Judge Failla said that she was not a random senator, but was involved in the space actively.
As a matter of fact, the senator has also co-sponsored legislation for implementing a regulatory structure that she believes does not exist in the Howey Test.
More details
This was in reference to the crypto legislation proposed by Senator Cynthia Lummis that would create a specialized regulatory framework for the crypto space.
The said legislation would also strip the SEC of its authority to go after most crypto exchanges and projects. The agency claims that the 1946 Supreme Court case grants it this authority.
Judge Failla appeared to be sympathetic to the senator’s desire to develop a specialized regulatory framework for the digital asset industry.
She also seemed to sympathize with Lummis’ claims that the Howey Test is not applicable to the crypto industry.
The SEC attorney argued that the legislation in question could set a bad precedent for securities regulation.
The judge stated that it was not repealing or overruling the Howey Test. The securities laws have governed all sorts of instruments for 90 years, but now there is something different.
The SEC has alleged that four components of the services provided by Coinbase are in violation of the securities laws.
These include its crypto taking services, its digital asset exchange, its Coinbase Wallet and also its services for institutional investors.
While each of the services were discussed at length on Wednesday, the hearing had been scheduled to mull over the motion for dismissal that Coinbase had filed.