Securities regulators oppose special treatment of crypto in Coinbase case

A body representing North America’s state securities regulators took aim at arguments made by crypto exchange Coinbase in its defense against the SEC.

Digital assets should not be seen as “somehow special,” nor should action against Coinbase be seen as “novel or extraordinary,” argues an association of North American securities regulators.

In an Oct. 10 filing in the United States District Court for the Southern District of New York supporting the U.S. Securities and Exchange Commission (SEC), the North American Securities Administrators Association (NASAA) argued that digital assets need not be given any special treatment when it comes to applying securities laws.

TradFi grey hairs file Amicus Curiae on behalf *drum roll* the SEC, in SEC vs. Coinbasehttps://t.co/ukeHcfcX8B

NASAA landing page screenshot and story attached. PROTECT. pic.twitter.com/DczmmRVlm5

— Mikko Ohtamaa (@moo9000) October 10, 2023

In June, the SEC sued Coinbase, accusing the publicly traded crypto exchange of violating federal securities laws. Coinbase fired back, arguing that digital assets and services it provided did not qualify as securities and that the agency was overreaching.

However, NASAA general counsel Vincente Martinez argued the SEC’s position is neither “novel or extraordinary.”

“The SEC’s theory in this case is consistent with the agency’s longstanding public position […] It is also well within the bounds of established law.”

The agency argued that the SEC doesn’t have to get explicit congressional authorization before applying established law to digital assets.

Howey test sufficient

One of the cornerstones of the lawsuit is expected to come from the judge’s interpretation of the Howey test, which is used to determine what qualifies as an investment contract. Coinbase has argued digital assets don’t satisfy all prongs of the test.

Martinez argued the Howey test was designed to be flexible enough to encompass all manner of technological advancements in the securities markets, including securities sold and traded on blockchains — similar to arguments previously made by the SEC.

“The Court should reject Coinbase’s attempt to narrow and misapply the established legal framework in order to avoid being subject to the same regulatory obligations as all other participants in the Nation’s securities markets,” Martinez said, adding:

“The Court should decline to treat digital assets as somehow special.”

Crypto impact overstated

Martinez also took a swipe at Coinbase’s argument invoking the “major questions doctrine,” which claimed executive agencies like the SEC need congressional approval when it comes to issues of major political or economic significance.

“Coinbase dubiously casts the ‘digital asset industry’ as ‘a significant portion of the American economy,’” Martinez said.

Related: SEC asks judge to reject Coinbase’s motion to dismiss lawsuit

However, Martinez said digital assets can’t be reasonably considered a significant component of the American economy as there is no practical economic use case or wide adoption of the vast majority of digital assets other than for speculation.

“With very few exceptions, digital assets are not widely accepted to pay for goods or services, nor can they be used to satisfy obligations to the government such as fees or taxes,” he wrote.

“As a class of assets, digital assets are not economically useful,” he said, adding:

“Coinbase overstates both the size and significance of this ‘industry,’ particularly the portion that securities regulators oversee.”

NASAA’s submission joined the SEC in asking the judge to deny Coinbase’s attempt to dismiss the SEC lawsuit.

Under the leadership of NASAA President Claire McHenry, NASAA members are advocating for investor protection in an era of technological innovation. Learn more about our legislative and regulatory priorities in this changing landscape: https://t.co/yNPvjGrUhC pic.twitter.com/4Gs5XU0NDt

— NASAA (@NASAA) October 10, 2023

NASAA comprises 68 members, inclusive of securities regulators from all 50 U.S. states, along with securities regulators in Canada, Mexico and several U.S. territories.

“NASAA and its members have a substantial interest in this case,” added Martinez.

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