A federal judge overseeing the SEC litigation against Coinbase ruled on Tuesday that the case must be stayed pending an appeals court decision. U.S. District Judge Katherine Failla agreed with Coinbase’s argument that too many courts around the country are coming to different conclusions about the legality of cryptocurrencies, which should be recognized as a new legal issue.
The ruling is undoubtedly a blow to the SEC, which for years under the Biden administration has argued that the sale of most crypto assets is patently illegal under existing securities laws.
In her ruling today, Judge Failla flatly rejected that position, finding that the question of how securities laws apply to cryptocurrencies is an “issue of first impression,” meaning an issue that has never been decided before and must be considered by the courts for the first time.
Because the legality of cryptocurrency is such a new and complicated legal issue, Failla wrote, it’s understandable why courts across the country are coming to different conclusions about the technology — a state of affairs that should not continue.
“There is conflicting authority regarding the application of Howey to cryptoassets,” the judge wrote, referring to the so-called Howey test, which the SEC and federal courts have long used to determine an asset’s status as a security. “The Howey App.” on cryptoassets raises a difficult issue of first impression for the Second Circuit.”
Despite strenuous objection @SECGovJudge Failla GRANTED our motion for leave to file an interlocutory appeal and STAYED the district court case. We appreciate the Court’s careful consideration. We go to the second circuit. pic.twitter.com/FuZ2jcYvfF
— paulgrewal.eth (@iampaulgrewal) January 7, 2025
In short, the Howey test– based in Supreme Court case in 1946 – states that an asset must check four boxes to qualify as an “investment contract,” a type of security. Basically, it boils down to investing money (buying assets) in a regular business (such as a company) with the expectation that you will get a return on that investment without any effort of your own. Stocks fit right into this category. Judge Failla apparently thinks this is not a settled issue when it comes to crypto tokens – so it’s the second circuit.
The Second Circuit Court of Appeals, one of thirteen federal appeals courts in the United States, will now decide whether to agree to hear the SEC’s case against Coinbase on a preliminary appeal. If he hears the case, a judge on that powerful circuit will then decide whether it should continue in Judge Failla’s courtroom or be dismissed on substantive issues.
In order to grant Coinbase’s motion for a preliminary injunction, Judge Failla had to find that immediately appealing the case in the middle of its proceedings would substantially increase the likelihood that it could be dismissed. She did, writing that today’s grant of the preliminary appeal “could result in the dismissal of most of the SEC’s claims against Coinbase.”
Naturally, the crypto-legal community expressed great excitement about the ruling this afternoon, with some experts speculating that it could have far-reaching implications.
“Today’s ruling in SEC v. Coinbase represents a potentially pivotal moment in the law surrounding digital assets,” Amanda Tuminelli, chief legal officer of crypto lobbying group DeFi Education Fund, said in a statement shared with Unscramble.
“For the first time, a federal circuit court will have the opportunity to address the controlling legal question of the scope of the SEC’s statutory authority over digital assets,” she continued. “If the Second Circuit agrees to hear Coinbase’s appeal, it will have the opportunity to provide the legal clarity the industry has been asking for.”
Bill Hughes, lead counsel for Ethereum software giant Consensys, argued that today’s decision by Judge Failla in the Coinbase case should be quickly applied to similar ongoing crypto lawsuits across the country.
“Any enforcement case brought by the SEC where this issue would substantially determine the outcome should be stayed,” the va said post on X (formerly Twitter).
The SEC did not immediately respond Unscramblerequest for comment on her reaction to today’s ruling.
The potential shakeup in the SEC’s crypto policy comes just weeks before Donald Trump is set to retake the White House and clean house for President Joe Biden. crypto-hostile management. Trump’s selection of former SEC Commissioner Paul Atkins as the agency’s next chairman was widely seen as a a very pro-crypto move which was supported by industry leaders.
How the pro-crypto SEC and DOJ under the Trump administration decide to navigate ongoing federal lawsuits against a number of US crypto firms remains an open question for now.
