Coinbase secured a procedural win in its legal battle against the US Securities and Exchange Commission (SEC) as a federal judge approved its request for an interlocutory appeal.
In a 7 January ruling, Judge Katherine Failla of the US District Court for the Southern District of New York granted the appeal, pausing proceedings until the Second Circuit weighs in on a critical legal question: whether cryptocurrency transactions must involve an actual investment contract to be classified as securities.
Judge Failla said in her order:
"As explained in the remainder of this Opinion, the Court certifies the Order for interlocutory appeal under Section 1292(b) because it presents a controlling question of law regarding the reach and application of Howey to crypto-assets, about which there is substantial ground for difference of opinion, and the resolution of which would advance the ultimate termination of the SEC's enforcement action."
Judge Failla acknowledged Coinbase's argument that courts nationwide have issued conflicting rulings on crypto's regulatory status, making it a novel legal issue.
Referencing the so-called Howey Test, the judge wrote:
“Conflicting authority exists regarding Howey's application to crypto-assets. The application of Howey to crypto-assets raises a difficult issue of first impression for the Second Circuit.”
The SEC's case hinges on the claim that certain crypto transactions qualify as investment contracts under its jurisdiction.
However, Failla noted the possibility of her interpretation being overturned, citing inconsistencies in rulings from cases against Terraform Labs and Ripple Labs.
Judge Failla expressed:
“Although the Court does not appreciate, and will not co-sign, Coinbase's efforts to cast aspersions on the SEC's approach to crypto-assets […] the fact remains that these conflicting decisions on an important legal issue necessitate the Second Circuit's guidance.”
Coinbase's Chief Legal Officer, Paul Grewal, expressed appreciation for the court's careful consideration.
Meanwhile, the exchange continues advocating for greater transparency from government agencies, particularly regarding alleged efforts to restrict crypto firms' access to banking, dubbed "Operation Chokepoint 2.0."
The crypto legal community reacted with enthusiasm to Judge Failla's ruling, viewing it as a potential turning point in the ongoing regulatory battle.
Coinbase Chief Policy Officer Faryar Shirzad described the decision as a significant setback for the SEC.
Amanda Tuminelli, chief legal officer at crypto lobbying group DeFi Education Fund said:
“Today's ruling in SEC v. Coinbase marks a potentially pivotal moment in the law related to digital assets.”
She added:
“For the first time, a federal circuit court will have the chance to address the controlling legal question of the extent of the SEC's statutory authority over digital assets. If the Second Circuit agrees to hear Coinbase's appeal, it will have the opportunity to provide legal clarity the industry has been asking for."
Fox Business reporter Eleanor Terrett called it "a big legal win for Coinbase," highlighting the rarity of such appeals.
Bill Hughes, senior counsel at Ethereum software firm Consensys, argued that the ruling should set a precedent for similar crypto-related lawsuits nationwide.
Katherine Minarik, Chief Legal Officer at Uniswap Labs, noted that the decision underscores the SEC's inconsistent and outdated approach to regulating digital assets.
Critics argue that the agency continues to apply antiquated securities laws to emerging blockchain technologies, creating legal uncertainty for the industry.
The US Court of Appeals for the Second Circuit, one of thirteen federal appellate courts, will now decide whether to hear the SEC's case against Coinbase on an interlocutory appeal.
If the court takes up the case and rules that the SEC misclassified Coinbase's activities as the trading of unregistered securities, the decision could have far-reaching implications for the broader crypto industry.
Should the Second Circuit proceed, a judge will determine whether the case should continue in Judge Failla's courtroom or be dismissed due to fundamental legal issues.
While many in the crypto community view this as a major victory, is it truly a turning point—or just a temporary reprieve in an ongoing regulatory battle?
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