Judge considers dismissing SEC regulation as Citigroup continues to raise Coinbase target price

Is cryptocurrency a security product? The long-running legal battle over cryptocurrency regulation in the United States is still going on. But from the latest developments, the balance of victory seems to be tilting towards exchanges.

A federal judge on Wednesday expressed skepticism about the U.S. Securities and Exchange Commission's (SEC) argument, noting that if it were to uphold the SEC's argument, it could inadvertently expand the definition of securities to areas such as collectibles that are not covered by the SEC's regulatory purview.

Judge questions SEC's overly broad definition of securities

On Wednesday local time, U.S. District Judge Katherine Polk Failla presided over a hearing in which Coinbase requested to dismiss the SEC’s civil lawsuit.

The SEC sued Coinbase in June last year, calling it an unregistered securities broker. Coinbase filed a motion to dismiss (MTD) in August, arguing that the SEC had no statutory authority to regulate cryptocurrency exchanges.

During the five-hour hearing, Failla seemed unconvinced by the SEC’s arguments, telling the SEC’s lawyers in court:

"I want to understand how your criteria do not address the collectibles market or commodities. I am concerned that your argument is too broad."

Failla did not make a ruling at the end of Wednesday's hearing, but is expected to make a decision in the coming months. If she allows all or part of the case to proceed, the lawsuit could go to trial next year.

Coinbase: Speculating in cryptocurrencies is like buying baseball cards or Beanie Babies, not securities

The legal standoff between Coinbase and the SEC is a critical moment in cryptocurrency regulation and compliance. The outcome of this case could set a precedent that affects how digital assets are regulated in the United States and around the world.

Moreover, the outcome of the case will also have a significant impact on Coinbase’s operations. Industry observers believe that if Coinbase is identified as a securities broker, it will be forced to restructure multiple services, such as trading, monitoring and custody, and the company may face major operational and financial challenges, with a maximum loss of 30% of revenue.

In suing major cryptocurrency exchanges such as Binance and Coinbase, the SEC cited the 1946 Supreme Court case SEC v. WJ Howey Co., which defined an investment contract, a type of security that is distinct from stocks and bonds.

The SEC has argued that most cryptocurrencies meet the definition of an investment contract, meaning Coinbase can’t trade cryptocurrencies without following the same rules as the New York Stock Exchange or Wall Street brokerages.

One of Coinbase’s defenses against the SEC’s allegations is the so-called “major questions doctrine,” which restricts U.S. federal agencies from enacting regulations with significant economic and political significance without explicit direction from Congress.

At a hearing on Wednesday, a lawyer for Coinbase said that Congress did not give the SEC the power to regulate cryptocurrencies, but the SEC did so on its own. If the court accepts the SEC's claims in the Coinbase case, it will have a "legislative impact" and "ripple throughout the industry."

In addition, regarding the SEC's claim that cryptocurrency is an investment contract, Coinbase argued that crypto assets do not come with rights such as dividends, nor do they make other contractual commitments, and therefore are not within the jurisdiction of the SEC. Transactions on the secondary market are only transactions between individuals, and there are no clear investment contracts unique to securities. Most cryptocurrencies are commodities, not securities. Investors may hope that cryptocurrencies will appreciate in value, just like collecting baseball cards or Beanie Babies, but this is not enough to make them securities.

After the hearing, Citi raised its price target for Coinbase from $90 to $151.

As of press time, Coinbase rose about 1% in pre-market trading.