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Coinbase believes the SEC is trying to “side-step” the Howey test by avoiding the question of whether a digital asset transaction carrying no post-sale obligations can be an investment contract.

The exchange made the claim in a motion for an interlocutory appeal filed with the US District Court for the Southern District of New York on May 24.

The appeal aims to challenge a recent court order concerning a critical legal question in its ongoing case with the SEC.

Appellate review

Coinbase’s motion centers on whether digital asset transactions that lack post-sale obligations can be classified as “investment contracts” under the Howey test, a standard used to define securities.

The district court’s decision on March 27 addressed this novel legal question, which could have significant implications for the crypto market. Coinbase asserts that no appellate court has yet determined if a digital asset transaction without post-sale contractual obligations can constitute an investment contract.

The exchange argued that this legal issue remains unresolved and is vital for the digital asset industry, necessitating immediate appellate review. Coinbase said:

“…the SEC ignores that no appellate court in the 78 years since Howey has found an investment contract absent a post-sale contractual undertaking…”

The SEC has opposed the motion, claiming the court’s order does not involve a controlling question of law and that there is no substantial ground for a difference of opinion.

However, Coinbase argued that the decision conflicts with established precedents, including the SEC v. Ripple Labs, Inc. case, which ruled that certain digital asset transactions did not meet the Howey criteria for investment contracts.

Additionally, the exchange said that the SEC’s attempt to conflate Ripple with Terraform Labs “rings hollow.” The exchange said:

“The split between these cases is one the Court explicitly recognized and one the Commission itself recognized until it became convenient not to.”

Appeal outcome

A successful appeal could potentially lead to the dismissal of significant portions of the SEC’s case against Coinbase, particularly those related to the company’s platform and Prime services.

These claims represent more than 70% of the complaint. Addressing the legal question on appeal could streamline the litigation process and reduce resource expenditure.

The SEC has imposed extensive discovery requirements on Coinbase, including numerous document requests, third-party subpoenas, and inspection requests. Resolving the foundational legal issue through an appeal could conserve judicial and party resources.

The outcome of this case may define the extent of the SEC’s authority over digital asset transactions as the crypto industry faces increasing regulatory scrutiny. Coinbase seeks to expedite appellate review to provide essential clarity and guidance for the industry.

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