Coinbase, the largest U.S. cryptocurrency exchange, has filed a petition with the U.S. Court of Appeals for the Second Circuit.
The company is seeking a ruling from the court that cryptocurrency trades conducted on its platform are not subject to federal securities laws.
This legal action stems from an ongoing dispute with the Securities and Exchange Commission, which sued Coinbase in 2023 for allegedly operating as an unregistered securities exchange, according to Bloomberg.
The central issue in this case is whether digital tokens qualify as securities under U.S. law. Securities, such as stocks and bonds, are regulated by the SEC to ensure investor protection.
If crypto tokens are classified as securities, platforms like Coinbase would be required to register with the SEC, which would impose significant compliance obligations and restrictions.
Howey test
The key legal question revolves around the “Howey test,” a framework the Supreme Court established in 1946 to decide if a transaction qualifies as an “investment contract.”
Coinbase contends that crypto trades on its platform do not meet the criteria outlined in the Howey test. The company argues that these transactions involve direct sales of digital assets between anonymous buyers and sellers, without any promises of shared profits or a common enterprise.
In a recent development, a federal judge in New York allowed Coinbase to appeal this issue directly to a higher court, pausing the SEC lawsuit in the meantime.
The company says resolving this question is crucial for the cryptocurrency industry, which has faced increased scrutiny and enforcement actions under the Biden administration.
Meanwhile, the SEC’s leadership has shifted under the Trump administration’s Acting Chair, Mark Uyeda.
The agency announced the formation of a task force focused on creating clearer regulatory guidelines for the crypto industry, signaling a potential shift away from the enforcement-heavy tactics seen in previous years.
