Coinbase 'Has an Uphill Climb' Against SEC: Former SEC Senior Trial Counsel

Coin Base is asking a judge to dismiss a lawsuit from the SEC. It comes after the regulator sued Coinbase in June alleging the exchange violated federal securities laws. Joining us now is Moses singer partner and former SEC, senior trial counsel Howard Fisher. Welcome to the show, Howard. Thanks for having me. All right, let's get right into this. This motion was filed on Friday. Coinbase says the regulator is stepping outside of its jurisdiction and that they do not offer investment contracts as defined by decades of Supreme Court and other binding legal precedents. What do you make of this argument? Do you think this is gonna work for Coin Base? Well, uh, I, I hate to sound like a lawyer but, uh, I'm a lawyer and I can't help it. So I'll say you sound like a lawyer. Yeah, I know, I know it, it, it, it, it's hard to get outside of my box sometimes. But, uh, I think coin base might have had an easier time a couple of weeks ago. And one of the things that makes their task more complicated is that a on July 31st judge Rakoff issued a decision in the terraform case which disagreed with Judge Torres's decision in the ripple case. So just to go back a step to the ripple case in the ripple case, Judge Torres said that uh offerings of coins to institutional investors are securities contracts but not offering them to retail investors on exchanges. Based on that decision. Arguably anybody who runs an exchange like coin base would have an argument to dismiss a case by the SEC because if it's not illegal for someone to offer coins on an exchange, it certainly can't be illegal for an exchange to offer coins for them. That was on July 13th on July 31st or a little bit more than two weeks later. Judge Rakoff issued a decision in the terra reform case in which said essentially, well, Judge Horus is wrong offerings of tokens on exchanges are also securities transactions. They could also be regulated by the SEC. Uh So the question is a little bit more complicated now and like everything in crypto world, the answer to the question depends on which week you ask it and you know what court cases have come out in the interim since then. So it's a little bit of a moving target. But coin base has an uphill climb on this. I think, speaking of questions, a major questions doctrine, uh something that that coin base brought up here. What does that mean? Ultimately, what are they trying to say about the S ecs? Uh uh, uh, future if you will, uh, and its role in crypto regulation. This is an argument along with due process claims that parties often bring when the SEC is moving into new areas. They argue, well, the SEC never regulated this before. And if they are going to regulate this, now they need an explicit grant from Congress of the authority to do so, uh, or on the due process side of it, they argue that we didn't have any news or uh information that indicated that our behavior was illegal. And so there was a due process violation in charging us for a a about this for now, uh when I was at the sec, we used to call that the Costanza defense. Ie wait, this is wrong. Had I known that this was wrong. I never would have done it. Uh And you know, when your defense to a case is taken out of a Seinfeld episode, it's probably not very effective. And courts that have dealt with the major questions, argument have almost uniformly rejected it because, you know, the court, the issue is not, has the sec done this before? The issue is, is what you're doing fit within the technical definition of what a securities transaction is. And you know, also for the digital asset world to say, well, this is something different. Well, yes, uh digital assets are something different. You know, this is a whole new area, a whole new field. A whole new line of business. I mean, it is not surprising that the SEC did not regulate this in 1977. Who are these regulators? Why are they going into, into crypto? Right. It would have been a little strange. Had they done this in the early eighties? People have been wondering, I'm not really sure what this case is about. Uh, you talk about this confusion soup if you will from the ripple case, the Terraform case Coinbase attached 10 different exhibits to their motion. And that included transcripts from library a case. We haven't spoken about long time. Um Feels like eons ago. Now, why is the library case relevant here? The Lbry case was one of the first decisions in which the SEC won a victory in which the court said that certain digital tokens which were coins to be used on an online video platform were actually security. So uh this case came out, I think it was November of 2022 if I recall correctly. Uh And it came out after a whole series of collapses in the crypto industry. And so if you contextualize it in that history, it looked like courts were reacting to that history saying, well, this stuff is problematic and we're going to find that this is a security. So that's what happened. Uh Then uh and then there was some language in the context of the appeal which indicated that while Lbry offering of this may have been a securities transaction. Other people's use of this on exchanges might not have been, but it's not at all clear what the ultimate, uh, effect and impact of that is going to be. So, uh, I mean, what do you think the odds are here? Do you, do you think, uh, coin base has a shot? And if it should they have a shot actually? I mean, like what, what, what's your take on, on whether or not they, they have a valid, uh they have valid points? Iii I think that uh as the cases proceed, I am becoming at least more convinced that uh coins qualify as securities, at least many coins do because they bear a lot of the elements of a traditional security of a stock. You're buying some thing, you hope that it increases in value, you hope that it increases in value because it's useful in some sort of context. I mean, it's like a stock enough uh that it fits within the description of what a securities transaction actually is. Uh the other issue to consider is that entities like coin base are trying to do everything. They're operating as an exchange, as a clearing house, as a broker dealer, as an investment place. And I think that no matter what happens with the court decisions, there is ultimately going to be some kind of legislative response which effectively will be some kind of a stay in your lane response. And we've already seen this in New York. New York State. There's a proposed legislation that would say that companies have to choose what they are. If they're in exchange, they can't be a broker dealer. If they're a broker dealer, they can't be a clearing house. I wouldn't be surprised to ultimately see that on some kind of federal level. Uh, and you had, you asked me a couple of months ago, is there any chance that Congress will come to some kind of bipartisan accord on how to regulate digital assets? I probably would have said that that was unlikely. But I think that with all of the different case is coming out, there is more of an impetus to some kind of congressional resolution and while it's still unlikely because we'd have to get a bipartisan consensus and bipartisan is like linear B it's a word that, you know, no one can translate to the current Congress. But III, I think it's becoming too important for people to overlook it for much longer. So I, I'm, I'm slightly more optimistic to see a legislative resolution to this. Right. Isn't that the? Yes. Yes. Yes. Yeah. Interesting. All right. How is good. We're gonna have to leave it there. Thank you very much for joining the show again this morning. It was wonderful to see you. Thank you. See, you too. Have a good day. That was Moses singer partner and former SEC, senior trial counsel Howard Fisher.