Coinbase Asks Appeals Court to Say Crypto Trade Unlike Stock (1)

Coinbase Inc. asked the Second Circuit to say that digital token trades on its platform aren’t transactions governed under federal securities law.

“There is no more pressing issue in securities law today than the scope of the Securities and Exchange Commission’s authority to regulate secondary trades of digital assets,” Coinbase said in its petition docketed in the US Court of Appeals for the Second Circuit. The appeals court could “clear away the cloud that currently hangs over the cryptocurrency market,” it said.

A Second Circuit decision finding that token trades aren’t securities transactions would speed the end of the SEC’s case against Coinbase, and loosen US crypto regulation following agency actions during the Biden administration. The Trump administration has indicated it’ll give crypto companies more regulatory leeway.

The case gives the appeals court a chance to weigh how it should apply the “Howey test” to crypto transactions. The US Supreme Court established the test in a 1946 opinion as a roadmap for determining whether a transaction is an investment contract.

Trades on Coinbase’s platform—the largest US crypto exchange—don’t constitute investment contracts, said the company’s brief. Rather trades are asset sales, it said. The parties are anonymous, make no promise other than the digital asset’s sale, and don’t have an obligation to one another beyond that. Coinbase said.

The US District Court for the Southern District of New York granted Coinbase’s request to seek an immediate appeal earlier this month in an SEC enforcement suit. The Howey question is “a difficult issue of first impression for the Second Circuit,” US District Judge Katherine Polk Failla said in allowing the interlocutory appeal.

The US Chamber of Commerce and nonprofit Blockchain Association have filed amicus briefs in favor of the Second Circuit taking up the case. Federal courts have been divided over whether crypto trades are investment contracts, with the Chamber of Commerce saying in its brief that “the absence of certainty will continue to produce deleterious effects.”

The SEC sued Coinbase in 2023, alleging the trading platform violated federal law by selling crypto as an unregistered securities exchange, broker, and clearing agency. Coinbase argued its crypto trades weren’t investment contracts and thus their regulation didn’t fall under the SEC’s purview. Failla previously said certain transactions involving tokens qualified as investment contracts, allowing the SEC case against Coinbase to move forward.

“Decades of appellate precedent confirms that an ‘investment contract’ requires something contractual,” Coinbase’s chief legal officer, Paul Grewal, wrote on X Jan. 17. “The Circuit can provide some urgently needed guidance on this foundational question of law,” Grewal said.

Trump’s SEC has launched a “crypto task force” to build a “clear regulatory framework” for such assets. A week before Trump took office, the US Court of Appeals for the Third Circuit ordered the SEC to explain why it denied Coinbase’s request for rules specific to the crypto industry, saying the agency provided insufficient justification for its decision.

Sullivan & Cromwell LLP and Wachtell, Lipton, Rosen & Katz represent Coinbase in its Second Circuit bid.

The SEC didn’t respond to an email seeking comment.

The case is Coinbase, Inc. v. SEC, 2d Cir., No. 25-145, brief docketed 1/21/25.