During the first hearing in the legal battle between Coinbase and the U.S. Securities and Exchange Commission (SEC), Judge Katherine Polka Fiala of the U.S. District Court for the Southern District of New York questioned both sides on a range of topics. These topics included the definition of staking, Coinbase’s IPO filings, and the use of the major questions doctrine. Judge Fiala showed skepticism towards the SEC’s messaging, saying there was “tension” between the Commission’s position that the agency was not looking to regulate crypto in its entirety and its efforts to enforce alleged securities laws violations.
The SEC counsel said that Bitcoin was not a security and its status was not in question, but that the Commission had not spoken on Ether. Discussion also touched on the Commission’s prior approval of Coinbase’s S-1, with Coinbase lawyers arguing that several of the crypto assets the SEC named in its suit as unregistered securities had been trading on the platform at the time the SEC approved Coinbase’s S-1. Judge Fiala said, “It’s not crazy for Coinbase to think what they were doing was OK based on the issuance of the S-1.”
The SEC and Coinbase also presented different definitions of Coinbase’s staking program, with Coinbase’s counsel arguing that staking services do not qualify as an investment contract. Coinbase lawyers said staking was equivalent to “payment for a service” and that there was “no risk to the staking party of loss,” rendering staking a services contract, similar to an IT function. However, an SEC lawyer argued that “IT services can be entrepreneurial,” thereby making staking an investment function.
The two sides also discussed the major questions doctrine, which could be used by Coinbase to argue that the SEC is overstepping its regulatory authority. “Has the [SEC] exercised authority in the way it has previously exercised authority? We think no,” said a member of the Coinbase counsel team. “We think it would be an expansion of authority.” Judge Fiala concluded the hearing by asking both sides to come up with a “realistic schedule” that took into consideration her “very busy” docket.