A body representing state securities regulators in North America has challenged arguments put forth by the crypto exchange Coinbase in its defense against the SEC. The North American Securities Administrators Association (NASAA) has made the argument that digital assets should not be considered “somehow special” and that actions taken against Coinbase should not be regarded as “novel or extraordinary.”
In a filing submitted to the United States District Court for the Southern District of New York in support of the U.S. Securities and Exchange Commission (SEC), NASAA asserted that there is no need for digital assets to be treated differently when applying securities laws.
Regulators oppose special treatment of crypto
In June, the SEC filed a lawsuit against Coinbase, alleging that the publicly traded crypto exchange had violated federal securities laws. Coinbase responded by contending that the digital assets and services it offered did not meet the criteria for securities and that the SEC was overstepping its bounds. However, NASAA’s General Counsel, Vincente Martinez, argued that the SEC’s stance is not unprecedented or extraordinary.
The agency asserted that the SEC is not required to obtain explicit congressional authorization before applying established laws to digital assets. A pivotal aspect of the lawsuit is expected to hinge on the judge’s interpretation of the Howey test, which determines what qualifies as an investment contract. Coinbase has argued that digital assets do not meet this test’s criteria.
Martinez maintained that the Howey test was designed to be adaptable enough to encompass various technological advancements in the securities markets, including securities traded on blockchains—an argument that aligns with previous statements from the SEC.
He emphasized that the Court should reject Coinbase’s attempt to narrow and misapply the established legal framework to avoid being subject to the same regulatory obligations as all other participants in the Nation’s securities markets. Further, he added that the Court should decline to treat digital assets as somehow special.
Martinez says crypto impact is overstated
Martinez also criticized Coinbase’s argument that invoked the “major questions doctrine,” asserting that executive agencies like the SEC require Congressional approval for matters of major political or economic significance. He noted that Coinbase’s characterization of the “digital asset industry” as a significant portion of the American economy was dubious.
Martinez contended that digital assets could not reasonably be deemed a substantial component of the American economy, given the lack of practical economic utility or widespread adoption for most digital assets, aside from speculative purposes. He pointed out that with very few exceptions, digital assets are not widely accepted to pay for goods or services, nor can they be used to satisfy obligations to the government, such as fees or taxes.
He further stated that digital assets are not economically useful as a class of assets. He added that Coinbase overstates the size and significance of this ‘industry,’ particularly the portion that securities regulators oversee.
NASAA’s submission aligns with the SEC’s stance in urging the judge to reject Coinbase’s attempt to dismiss the SEC lawsuit. NASAA comprises 68 members, including securities regulators from all 50 U.S. states and securities regulators in Canada, Mexico, and several U.S. territories. Martinez emphasized that NASAA and its members have a substantial interest in this case.
SEC’s argument in Coinbase case
The SEC recently stated its view that cryptocurrencies have no “innate or inherent value” as part of their case against Coinbase. This position has prompted skepticism from both Coinbase and observers in the crypto space.
In response to a motion filed by Coinbase to dismiss the SEC’s lawsuit over the summer, the SEC urged a judge to reject Coinbase’s assertion that cryptocurrency trading does not constitute an investment contract between parties. The SEC stated that if crypto-assets embody some underlying value, that value is accessed through the digital token. It argued that the token itself lacks any intrinsic value; instead, its worth is derived from its underlying value, which, in the case of the crypto assets under consideration, is the investment contract.
Coinbase’s Chief Legal Officer, Paul Grewal, brushed off the SEC’s arguments, dismissing them as a reiteration of their longstanding position. Grewal asserted that, according to the SEC’s logic, everything from Pokemon cards to stamps to Swiftie bracelets could also be considered securities. He emphasized that the law does not support this interpretation, nor should it be, as highlighted by New York congressman Rep. Ritchie Torres last week.
