The crypto industry is on the edge of its seat as Coinbase, one of the oldest and most recognized companies in the sector, faces a legal battle against the US Securities and Exchange Commission (SEC). The heart of the dispute revolves around the classification of securities and the role of staking within the crypto landscape.
According to a report by Tracy Wang for CoinDesk, during the initial court hearing, Judge Catherine Polka Faila took center stage and probed both sides with pointed questions. The judge’s skepticism of the SEC’s position was evident, as she pointed out the inconsistency between the SEC’s assertion that it does not intend to regulate all cryptocurrencies and its pursuit of securities law violations against Coinbase.
A representative of the SEC was adamant that the agency’s focus is on regulating behavior, not specific assets. However, when questioned about the Commission’s stance on Bitcoin and Ether, the representative confirmed that Bitcoin’s status as a non-security was not in dispute, but remained silent on Ether.
A major point of disagreement arose around the SEC’s earlier approval of Coinbase’s S-1, the form required for an initial public offering (IPO). When the SEC approved Coinbase’s S-1, Coinbase’s legal team pointed out that many of the crypto assets named in the SEC’s lawsuit were being traded on the platform.
The two parties also clashed over the nature of Coinbase’s staking program. Coinbase’s lawyers argued that the staking services do not constitute an investment contract, likening it to a paid service where the staking party does not incur losses. The SEC, on the other hand, countered that even IT services could have an entrepreneurial aspect and thereby classify the stock as an investment activity.
The case also looked into the major questions doctrine, a legal principle that Coinbase could use to argue that the SEC is overstepping its regulatory boundaries. The US Supreme Court recently applied this doctrine to invalidate President Biden’s student loan forgiveness plan.
Crypto lawyer “Meta Lawman” offered a word of caution, advising against drawing too many conclusions from the judge’s opening remarks, adding that the judge had only brief letters from each side based on her comments. However, he acknowledged that the judge’s questions were insightful and that she was skeptical of some of the SEC’s responses.
According to a blog post by Coinbase published on July 14, 2023, the SEC and state regulatory bodies from ten states have filed charges against Coinbase that focus on the crypto platform’s retail staking services. Authorities from states such as California, New Jersey, South Carolina and Wisconsin have pressed for operational changes to Coinbase’s services, despite the platform’s transparent and secure handling of staking services for nearly four years.
Coinbase strongly disputes the allegations, arguing that staking is a critical function of the crypto economy that benefits billions of global users and is not an investment. According to Coinbase, staking is not only part of their business offering, but also a cornerstone of the crypto industry, and therefore, the company is committed to protecting access to staking for everyone.
Regulatory hurdles mean customers in California, New Jersey, South Carolina and Wisconsin will face temporary restrictions on depositing additional assets through Coinbase. However, Coinbase assures that this will not affect the majority of their customers, and assets deposited prior to orders will not be affected.
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