(Bloomberg) — Coinbase Global Inc. said buying cryptocurrency on an exchange was more like collecting Beanie Babies than investing in a stock or bond.
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The biggest US crypto exchange made the comparison Wednesday in a New York federal court hearing. Coinbase was arguing for the dismissal of a Securities and Exchange Commission lawsuit accusing it of selling unregistered securities.
William Savitt, a lawyer for Coinbase, told US District Judge Katherine Polk Failla that tokens trading on the exchange aren’t securities subject to SEC jurisdiction because buyers don’t gain any rights as a part of their purchases, as they do with stocks or bonds.
“It’s the difference between buying Beanie Babies Inc. and buying Beanie Babies,” Savitt said.
The question of whether digital tokens are securities has divided courts. Another Manhattan federal judge ruled in July that exchange sales of Ripple Labs XRP token weren’t subject to SEC jurisdiction, while yet another judge that same month reached the opposite conclusion in the regulator’s case against Terraform Labs Pte.
Collecting Boom, Bust
Coinbase is asking Failla to follow the Ripple decision in dismissing the SEC’s suit. The judge ended the hearing without ruling.
Beanie Babies, which were the subject of a 1990s collecting boom and bust that some have likened to crypto, had come up earlier in the hearing when Failla expressed concern that the SEC’s position might lead to the regulation of collectibles. Lawyers for the government responded that buying an item like a baseball card or a figurine doesn’t mean that someone is buying a stake in the enterprise that makes such items.
But they said that wasn’t the case with tokens sold on Coinbase.
“When they buy this token, they are investing into the network behind it,” SEC lawyer Patrick Costello said. “One cannot be separated from the other.”
The SEC sued Coinbase in June, alleging that the exchange skirted its rules for years by allowing users to trade numerous crypto tokens that were actually unregistered securities. The regulator points to a 1946 Supreme Court decision defining a security as an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
‘Water’s Edge’
Lawyers for the SEC on Wednesday pressed Failla to reject Coinbase’s arguments, saying that the exchange is leading customers to believe that some of the digital assets they buy on the platform will increase in value.
Savitt acknowledged that buyers of digital assets on Coinbase may believe that their investments could rise in value, but he said that’s not enough.
“Agencies have authority and the commission has broad authority within the world of securities to regulate,” he said. “But it does stop at the water’s edge.”
Bloomberg Intelligence senior litigation analyst Elliott Stein said Coinbase could face a $1 billion liability to the SEC, but he thinks the exchange has a 70% chance of ultimately prevailing in the case.
The case is Securities and Exchange Commission v. Coinbase Inc., 23-cv-04738, US District Court, Southern District of New York (Manhattan).
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