Important points
The ruling allows Coinbase to seek clarity on whether investment contracts require the existence of an actual agreement. Judge Feira emphasized that the case presents “rule of law issues” regarding the application of the Howie test to crypto assets.
The United States District Court for the Southern District of New York has granted permission for Coinbase to file an interlocutory appeal in its ongoing legal dispute with the U.S. Securities and Exchange Commission (SEC).
The Jan. 7 ruling by Judge Katherine Polk Feira temporarily halts the proceedings and allows Coinbase to seek clarification on whether the investment agreement requires the existence of an actual agreement. . The appeal will now be transferred to the Second Circuit Court of Appeals.
Interlocutory appeals are relatively rare and usually indicate that the trial court recognizes the need for a high degree of judicial review of important legal issues. Judge Feira said the case presents “a governing question of law” regarding the application of the Howie test (a test used to determine what qualifies as a security) to crypto assets. He emphasized.
He also noted that there have been “conflicting conclusions” in other SEC cases, such as those involving Ripple Labs and Terraform Labs, further emphasizing the need for guidance from the appellate courts. “These contradictory decisions on important legal issues require guidance from the Second Circuit,” she wrote in her decision.
The SEC filed a lawsuit against Coinbase in June 2023, alleging that Coinbase had been operating as an unregistered securities exchange, broker, and clearinghouse since 2019. Regulators allege that certain transactions were facilitated by Coinbase, including the staking program and transactions related to the staking program. Cryptocurrency offerings must qualify as investment contracts and be subject to their supervision.
The SEC’s central argument is that these transactions meet the Howie test. The Howie test assesses whether a financial transaction involves investing money in a public company with the expectation of profit from the efforts of others.
Coinbase disputed this interpretation, arguing that crypto tokens traded on the platform do not meet the requirements of the Howey test because token issuers have no direct obligation to purchasers.
Coinbase Chief Legal Officer Paul Grewal welcomed the court’s decision, writing on X (formerly Twitter), “We appreciate the court’s careful consideration in granting this appeal.” He also used a sports metaphor to explain the situation, likening it to a referee pausing a game to review a key play.
Legal experts have emphasized the far-reaching implications of this decision. Jeremy Hogan, a partner at Hogan & Hogan, noted that interlocutory appeals are unusual and suggested that trial judges recognize the importance of appellate review.
Similarly, Jake Chervinski, chief legal officer at Valiant Funds, said the appeal is a major development, saying the Second Circuit’s decision will help clarify how securities laws govern transactions in the secondary market for cryptocurrencies. It suggested it could provide much-needed clarity on how it applies.
Many in the cryptocurrency industry have often criticized the SEC for relying on enforcement actions rather than issuing clear rules. Coinbase has voiced opposition to the SEC’s actions, arguing that they stifle innovation and create uncertainty.
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