Are Cryptocurrencies ‘Special’? Regulators Argue Against Special Treatment in Coinbase SEC Lawsuit

The ongoing legal battle between the U.S. Securities and Exchange Commission (SEC) and crypto exchange giant Coinbase just got a significant boost for the SEC. According to a prominent association of North American securities regulators, digital assets shouldn’t receive any preferential treatment under existing securities laws. This stance, revealed in a recent court filing, intensifies the debate around crypto regulation and its place within the traditional financial system. Let’s dive into what this means for Coinbase, the broader crypto market, and the future of digital asset regulation.

Why Are Securities Regulators Stepping In?

The North American Securities Administrators Association (NASAA), a body representing securities regulators across the U.S., Canada, and Mexico, has firmly sided with the SEC in its lawsuit against Coinbase. In an October 10th filing, NASAA argued that treating digital assets as “special” is unwarranted and that applying existing securities laws to the crypto space is neither “novel nor extraordinary.”

This intervention comes as the SEC accuses Coinbase of violating federal securities laws. Coinbase, in turn, has defended itself by claiming that the digital assets and services it offers do not qualify as securities, accusing the SEC of regulatory overreach. However, NASAA’s General Counsel, Vincente Martinez, refutes this, stating the SEC’s position is consistent with its long-standing public stance and well within established legal boundaries.

“The SEC’s theory in this case is consistent with the agency’s longstanding public position […] It is also well within the bounds of established law.” – Vincente Martinez, NASAA General Counsel

NASAA emphasizes that the SEC does not require explicit new congressional authorization to apply existing laws to digital assets. They believe the current legal framework is sufficient to oversee the crypto market.

The Howey Test: Is It Enough for Crypto?

A crucial aspect of the SEC’s case, and the broader debate around crypto regulation, revolves around the Howey Test. This legal test determines whether a transaction qualifies as an “investment contract” and thus falls under securities laws. Coinbase argues that digital assets don’t meet all criteria of the Howey Test.

However, NASAA counters that the Howey Test is designed to be adaptable and encompass technological advancements, including blockchain-based securities. They argue against Coinbase’s attempt to narrowly interpret the Howey Test to escape securities regulations.

“The Court should reject Coinbase’s attempt to narrow and misapply the established legal framework in order to avoid being subject to the same regulatory obligations as all other participants in the Nation’s securities markets,” Martinez stated.

Essentially, NASAA is urging the court to avoid creating a separate, “special” category for digital assets when it comes to securities law.

Is the Crypto Industry Overstating Its Economic Impact?

NASAA also challenged Coinbase’s invocation of the “major questions doctrine.” This doctrine suggests that executive agencies need explicit congressional approval for actions with major political or economic significance. Coinbase seemingly argues that regulating the “digital asset industry” falls under this doctrine due to its economic significance.

Martinez dismissed this argument, stating Coinbase “dubiously casts the ‘digital asset industry’ as ‘a significant portion of the American economy.’” He argued that, despite the hype, digital assets lack widespread practical economic use beyond speculation.

Here’s a breakdown of NASAA’s perspective on the economic utility of digital assets:

• Limited Real-World Use: NASAA contends that, with few exceptions, digital assets are not widely used for everyday transactions like buying goods and services.
• No Government Integration: They point out the lack of acceptance of digital assets for government obligations such as fees and taxes.
• Speculation-Driven Market: The core argument is that the primary function of most digital assets is speculation rather than practical economic application.

Martinez concludes that Coinbase exaggerates the size and importance of the crypto industry, particularly the portion that securities regulators oversee.

NASAA’s involvement adds significant weight to the SEC’s case. Comprising regulators from 68 jurisdictions, including all 50 U.S. states, their unified stance underscores a broad consensus among securities regulators regarding crypto regulation.

Related: SEC asks judge to reject Coinbase’s motion to dismiss lawsuit

What’s Next for Coinbase and Crypto Regulation?

NASAA’s amicus brief further strengthens the SEC’s position and puts more pressure on Coinbase. The judge will now need to consider these arguments when deciding on Coinbase’s motion to dismiss the lawsuit. This case is pivotal as it could set significant precedents for how cryptocurrencies and crypto exchanges are regulated in the U.S.

Here are some key takeaways:

• No Special Status: Regulators are pushing back against the idea that digital assets deserve special treatment under securities laws.
• Howey Test Remains Relevant: The existing Howey Test is seen as sufficient to classify many digital assets as securities.
• Economic Utility Questioned: The practical economic use of many digital assets beyond speculation is being challenged by regulators.
• Increased Regulatory Scrutiny: This case signals continued and potentially intensified regulatory scrutiny for the crypto industry.

The outcome of the SEC v. Coinbase lawsuit will have far-reaching implications. It will not only impact Coinbase but also shape the regulatory landscape for the entire cryptocurrency market, potentially defining the boundaries of SEC oversight and the future of crypto innovation in the United States. The message from NASAA is clear: crypto is not operating outside the existing financial rules, and regulators intend to ensure it adheres to them.