Coinbase asks the court to declare that crypto are not security

A couple of days ago, Coinbase asked the United States Court of Appeals for the Second Circuit to establish that cryptocurrency transactions should not be considered security transactions, but sales of digital assets. 

The issue comes from afar and was raised by the SEC of the former president Gary Gensler, who, however, has never managed to provide evidence that crypto should be considered securities. 

Since the SEC neither has the power to legislate nor to impose its interpretations of the law, it must be the courts that determine what should be considered a security and what should not, as has already happened, for example, with XRP. 

Cryptos as security

According to the SEC of Gary Gensler, many cryptocurrencies should be considered securities. 

On Bitcoin and Ethereum there are now no more doubts about the fact that they cannot be considered securities, but for many other cryptos, doubts remain.

For now, practically only on XRP there has already been an explicit verdict from a court, which has written in black and white that it cannot be considered a security when it is traded on secondary markets like crypto exchanges. 

Although in theory the same rule should also apply in other similar cases, to tell the truth, cryptocurrencies are not at all similar to each other, therefore in theory a court ruling would be needed for each individual crypto. 

Coinbase aims instead at another approach. 

Coinbase’s Request: Cryptos Are Not Securities

The exchange has indeed decided to ask the United States Court of Appeals for the Second Circuit to rule in a generic way, that is, not in reference to a single cryptocurrency, but on a general level.

In this regard, Coinbase states that it is of enormous importance for the crypto sector to understand whether transactions of criptovalute on the secondary market should be considered investment contracts under securities laws or not.

It should not be forgotten that Coinbase itself was accused and sued by Gensler’s SEC for suspected offering of unregistered securities to the public, and that there is still an ongoing legal proceeding against it, also because Gensler resigned only on Monday. 

According to the exchange, its legal case represents the ideal opportunity to address the issue, in order to provide the entire sector with clear rules coming from a court, and not from the interpretations of a government agency. 

Moreover, Coinbase itself has accused and sued the SEC for refusing to provide crypto exchanges with the guidelines to follow before suing them, despite being explicitly asked to do so by the exchanges themselves. 

The rules in the USA

The USA has not yet established specific regulations dedicated to cryptocurrencies. 

However, it must be said that the classic regulation that governs securities in theory could also be applied as such to cryptocurrencies, so much so that a court has already legally ruled on a cryptocurrency on this topic, namely XRP, establishing that the current regulations do not allow it to be declared a security. 

Coinbase emphasizes that there are currently no clear rules on this point that exchanges can simply comply with, and that without them, the players in this market face different rules in different courts, in addition to the fact that neither the SEC nor Congress are certain about who should be considered responsible for regulating the trading of digital assets. 

In particular, the company argues that on crypto exchanges, sellers and buyers are anonymous to each other, and they do not engage in any exchange or promise other than the sale of the digital asset itself, without any obligation or ongoing commitment to one another. Furthermore, buyers do not obtain any rights against the issuer of the asset. 

This actually seems incompatible with the characteristics of a true investment contract. 

The consequences

It should be emphasized that for now it is only a request made by a private entity to a court. 

However, the lawyers of Coinbase argue that the Court of Appeal should rule on the issue, precisely to finally provide regulatory clarity that is lacking. 

While on one hand, up until now the SEC has practically lost on all fronts in its attempt to have crypto declared as securities, it is by no means certain that the Court of Appeals will actually decide to rule in such a generic manner as requested by Coinbase. 

And not even the fact that Gensler has resigned, and that the SEC under the Trump administration has initiated a decidedly more crypto-friendly phase, could have consequences on the decision of the Court of Appeals. 

However, it is clear that there are contrasting interpretations coming from different courts regarding the issue raised by Coinbase, therefore a clear, unique, and definitive decision would indeed be necessary. 

For this reason, Coinbase has asked the Second Circuit to accept the review of this case, in order to resolve the issue clearly, once and for all.