Coinbase Seeks to Take Core Question in U.S. SEC Case to Higher Court

The crypto exchange is trying to appeal part of a judge's recent denial of its motion to dismiss, focusing on whether the SEC can treat secondary trades as investment contracts.

Coinbase has filed a so-called interlocutory appeal in federal court to challenge just a single legal point at the heart of its dispute with the U.S. Securities and Exchange Commission.

• The appeal is asking a higher court to review whether a digital asset transaction that poses no obligation to the original issuer of the asset should be considered an investment contract that would be regulated by the SEC.

Coinbase is seeking to rip the bandage off of a legal impasse at the center of the crypto industry's fight with the U.S. Securities and Exchange Commission (SEC), filing an interim appeal on Friday that would ask a higher federal court to drill into the heart of the regulator's stance on digital assets, even as the broader SEC case proceeds through the judicial system.

The U.S. exchange filed what's known as an interlocutory appeal that raises a narrow point of legal disagreement and seeks to get it considered on its own, in this case by the U.S. Court of Appeals for the Second Circuit. Recently, a federal judge had denied Coinbase's effort to get the SEC case against the company thrown out before trial, and now Coinbase is formally asking the court to weigh whether the SEC can treat a digital asset transaction as an investment contract if it's not connected to any legal obligation from the asset's original issuer.

Coinbase argued in its appeal request that the use of the so-called Howey test on cryptocurrency assets by the SEC has left a murky understanding of what makes a security.

“The application of Howey to digital asset transactions raises hard questions,” Coinbase argued. “That members of Congress, senators and regulatory agencies have divided in answering them bespeaks the difficulty of the subject matter, and the divergent judicial outcomes illustrate the point.”

Such appeals are typically longshots, as the SEC found out when it filed a similar one in its own case against Ripple and was denied. But if it were granted, the question could move the industry one step closer to what could eventually be a U.S. Supreme Court ruling that settles the matter permanently.

Investment contracts are securities regulated by the SEC, so if a crypto transaction qualifies, it belongs in the agency's jurisdiction and should be properly registered under the law. The regulator has argued before lawmakers and courts that the vast majority of digital assets are securities, but Coinbase and others from the industry contend that once the asset hits secondary markets and is no longer connected to the business that issued it, the token is beyond the SEC's legal reach. Answering this dispute would be fundamental for the U.S. crypto sector.

Judge Katherine Polk Failla, of the U.S. District Court for the Southern District of New York, ruled last month that the SEC had demonstrated enough of its legal premise in its accusations against Coinbase that the court would move forward with most of the case. Coinbase's new appeal of one piece of that decision would have to be accepted by Judge Failla and the Second Circuit in order to move forward. If they take it up, the rest of the case stays in place in Failla's court as the regulator and the company move toward trial.

Coinbase's case is considered one of the decisive legal battles that could determine the course of the industry in the U.S. So far, the SEC has had a mixed record of some big losses (such as against Ripple) and some significant gains (such as in its case against Terraform Labs and in an insider-trading case connected to Coinbase).

SEC spokespeople did not immediately return a request for comment.