Coinbase Fights Back: Interlocutory Appeal Against SEC

Coinbase is seeking an interlocutory appeal in its ongoing legal battle with the United States (US) Securities and Exchange Commission (SEC), marking the latest twist in a closely watched lawsuit that began in June 2023.

The exchange's motion, filed on 12 April, aims to seek constitutional clarity on a pivotal "controlling question of law" amidst allegations by the Commission regarding its operation as an "unregistered securities exchange, broker, and clearing agency."

The filing pointed out that:

"The question presented here is unencumbered by factual disputes and therefore ripe for immediate review."

Coinbase's Chief Legal Officer, Paul Grewal, detailed in a post on X (previously known as Twitter), that the crux of the matter revolves around whether an investment contract necessitates "something contractual" post-sale.

While Coinbase argues for contractual obligations following the sale, the SEC contends otherwise.

This appeal follows US District Judge Katherine Failla's rejection of Coinbase's motion to dismiss the SEC's case, asserting that it operates as an unregistered exchange, broker, and clearing agency.

Yet, approval of the interlocutory appeal could significantly shape the case's trajectory, given the SEC's assertion that Coinbase crypto transactions constitute investment contracts "despite an absence of any alleged contractual undertakings."

Paul emphasized the timeliness of Coinbase's appeal request, submitted just 17 days after the motion to dismiss was denied:

"We're asking to take this up on appeal earlier than normal because it's critical to our industry. The SEC's action against us and other digital asset companies goes way beyond the legal authority granted by Congress and puts an unjust cloud over US digital asset innovation."

While such appeals are often considered longshots, the SEC experienced a similar outcome when it filed a comparable request in its case against Ripple and was rejected.

However, if this appeal process is granted, it could potentially propel the industry one step closer to a definitive resolution, possibly through a ruling from the US Supreme Court.

When approached for comment on the attempted appeal, an SEC spokesman indicated that any response would be made through public filings to the court.

Investment contracts fall under SEC regulation, meaning that if a crypto transaction meets the criteria, it falls within the agency's jurisdiction and should be lawfully registered.

The SEC has consistently argued to lawmakers and courts that the majority of digital assets qualify as securities.

However, Coinbase and other industry stakeholders argue that once an asset enters secondary markets and loses its connection to the originating business, it surpasses the SEC's regulatory purview.

Resolving this dispute is critical for the US crypto sector.

Judge Katherine, presiding over the US District Court for the Southern District of New York, ruled last month that the SEC had sufficiently demonstrated its legal foundation in the accusations against Coinbase, allowing most of the case to proceed.

For Coinbase's new appeal to advance, it must be accepted by Judge Katherine and the Second Circuit.

If accepted, the remainder of the case remains with the judge's court as both parties progress towards trial.