Coinbase Shares, Terraform Labs, and Huawei Debate in 5-Hour SEC Hearing

U.S. District Judge Catherine Polk Fayla heard arguments in June 2022 against the crypto exchange's Securities and Exchange Commission (SEC) and Coinbase to dismiss the lawsuit filed by the administrator.

The hearing lasted nearly five hours and provided a broad overview of key arguments in the courts about the crypto space, assets and the SEC's role in regulating the industry.

During the hearing, Judge Failla critically examined the regulator's case against crypto exchanges, with SEC attorneys questioning why digital token issuance meets the Hawaii test and arguing that the case is “too broad.”

In the SEC's view, token buyers are investing in the underlying network or ecosystem, which indicates that there is value behind the token purchase. Coinbase's lawyers, however, countered the argument that Bitcoin – which was described as a commodity by an SEC lawyer during the hearing – is also supported by a community and has a network.

Judge Failla took a deep look at staking and secondary market transactions, as well as recent court decisions on cryptocurrencies such as the Ripple and Terraform Labs cases. Cointelegraph summarizes the most popular topics of the hearing below.

Coinbase is trying to create a separate Hawaii test, the SEC says

Lawyers representing the SEC argued that the exchange was trying to create a different version of the Hawaii test that would allow the trading of crypto tokens in what the regulator described as “joint venture” ecosystems that offer holders.

The SEC argued that the exchange performed an independent Hawaii test, which led to different interpretations of the status of some tokens. According to the SEC, this discrepancy in Tokens' conclusion regarding the challenge provides sufficient grounds to deny the motion and allow the case to proceed.

We believe they are creating a new challenge, and we believe our position is the most honest and consistent, but forced by the Hawaii challenge. It's not just compelling reading, as they say.”

SEC v @coinbase Update IV

Unusually, the judge went straight to questioning the lawyers, rejecting any arguments presented to him by either side.

The first 2 hours were spent just questioning the SEC attorneys.

The SEC lawyers had better prepare…

— MetaLawMan (@MetaLawMan) January 17,

Terraform Labs container enters the stage

During the hearing, the SEC discussed the recent ruling against Terraform Labs, which sold digital assets as securities without registration. According to the SEC, the decision provided additional reasons for the lawsuit against Coinbase.

The issue was discussed at length in the hearing. According to SEC attorneys, Ripple and Terraform Labs' cases may differ from Coinbase's, but the Hawaii test applies similarly.

“Our view is that they are the same in the Hawaii test that they apply,” the SEC said. “We think Coinbase is trying to create a different Hawaii challenge when people on this table sell the tokens to each other. Platform and Terraform sell the tokens on Coinbase's platform.

And we think that's just wrong, your honor.

Coinbase's legal team has argued that the Terraform Labs case does not cover secondary market transactions that take place on Coinbase's platform. Another key distinction the court appointed in the Terraform Labs dispute was that the investors and the company had a personal relationship.

But they argued that the Terraform case at first did not involve a secondary market transaction as the court knew.

In that case, there were no secondary market transactions. […] All these were situations where there was a relationship between the investor and the promoter.

In addition, Coinbase Counsel explored the legal requirements to form an investment contract under US law, which requires a financial arrangement in which an individual invests money in a venture managed by another entity that is expected to make a profit.

“An investment contract requires, at a minimum, that the parties agree or plan together to make the investment in the contractor's profit-seeking activities.”

According to Coinbase, users may or may not seek a return on investment by trading tokens on the platform, as tokens may also be available for their own use. Judge Faila added that investors can buy tokens because they are “cool” or because they have friends.

Ripple, stocks and more talk about secondary market transactions

Coinbase has argued that token holders do not receive dividends or have legal rights to the project simply because they own tokens, as opposed to shares.

“A stock reflects an interest in the fixed capital of the corporation. And when it is traded, the interest in the fixed capital of the corporation that participates in the capital structure is completely transferred from one owner to another owner.”

The discussion on stocks and crypto tokens stems from Ripple's decision from July 2023, when Judge Annalisa Torres ruled in favor of Ripple Labs that the XRP token exchange was not safe to sell through programmatic sales. However, Judge Torres also found that XRP is safe when sold to institutional investors, meeting the requirements of the Howey test.

Related: Coinbase Denies Senator Warren's Government Insider Allegations

“The critical step there is that Judge Torres found that the XRP secondary market token purchases were not an investment in Ripple. And in that sense, he rejected what I think is a major part of the Commission's argument in front of the court today, which is its investment in the ecosystem.” , at least in regard to transactions between strangers, where there is no relationship, where obligations do not flow.

In Coinbase's view, blind transactions between individuals do not constitute an investment agreement.

On June 6, 2023, the SEC sued Coinbase, a cryptocurrency exchange that violated federal securities laws. The agency stated that 13 tokens listed on the exchange are securities, including coins such as Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), The Sandbox (SAND), Axie Infinity (AXS), Chiliz (XX Infinity). He argued. CHZ), Flow (Flow), Internet Computer (ICP), Near (Near), Voyager (VGX), Dash (DASH) and Nexo (NEXO).

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