Coinbase notched a partial win — and a partial loss — in a judgment from Judge Katherine Polk Failla in the Securities and Exchange Commission’s case against the crypto exchange on Wednesday.

The denial wasn’t unexpected, as even Paul Grewal, Coinbase’s chief legal officer, noted that the team “[was] prepared” for this type of decision.  

The SEC’s legal fight with Coinbase officially began last June when the securities regulator first filed suit. Gary Gensler’s SEC is alleging that Coinbase operated as an unregistered exchange, broker and clearing agency. 

Additionally, the SEC targeted both its staking-as-a-service program and its wallet offering.

On Wednesday, Judge Katherine Polk Failla largely denied Coinbase’s motion for a summary judgment, which means that the legal battle between the two will continue.

Failla, in her opinion, said that the SEC “sufficiently pleaded” that Coinbase operated as an exchange, clearing house and a broker under the law. She also found that the staking program engaged in the sale and offering of unregistered securities. The SEC and Coinbase now have until April 19 to submit a case management plan to the court. 

Here’s a breakdown of the 84-page opinion. 

Major questions doctrine 

Coinbase, early on in the case, raised the argument that the major questions doctrine applied to the SEC in its case. The doctrine states that government administrative agencies must be able to call back to congressional authorization before pursuing regulation issues with both economic and political significance. 

In its previous arguments, Coinbase said the clarity around crypto regulation remained opaque. 

Read more: Coinbase makes international moves as US regulators stall

Judge Failla said the enforcement action by the SEC does not fall under the doctrine itself. She further stated that the doctrine is meant to be used in “extraordinary” cases, which means it can rarely be “successfully invoked.”

“While certainly sizable and important, the cryptocurrency industry ‘falls far short of being a ‘portion of the American economy’ bearing ‘vast economic and political significance,” Failla wrote, citing a similar finding in the SEC’s case against Terraform. 

The SEC, she said, is only utilizing its regulatory authority to enforce laws around potential investments. 

Failla’s finding isn’t necessarily surprising, however, since she previously warned that she didn’t believe the crypto industry warranted invoking the doctrine at a January hearing. 

Howey’s role

The Howey test is used to define an investment contract. The test consists of three prongs: “(i) an investment of money (ii) in a common enterprise (iii) with profits to be derived solely from the efforts of others.”

Judge Failla noted that other crypto cases on the same circuit have dealt with multiple questions and arguments about when Howey can be applied and to what it can be applied to.

“Several teachings can be gleaned from these thoughtful decisions. To begin, there need not be a formal contract between transacting parties for an investment contract to exist under Howey despite multiple arguments from crypto parties pushing for a contract,” she wrote. 

She specifically cited Terraform again, in which Judge Jed Rakoff sided with the SEC and granted a summary judgment in the SEC’s favor, which asserted that UST, LUNA, wLUNA and MIR constituted as investment contracts under the Howey test. 

Using that test, Failla explained, the SEC’s allegation that “certain” crypto transactions fall under Howey has merit. 

“As detailed in the Complaint, token issuers, developers and promoters frequently represented that proceeds from crypto asset sales would be pooled to further develop the tokens’ ecosystems and promised that these improvements would benefit all token holders by increasing the value of the tokens themselves,” Failla wrote. 

While no specific crypto assets were named — the SEC alleged in its initial complaint that a number of cryptocurrenceis fall under the definition of an investment contract — Failla’s citations include mentions from the original complaint about Solana and Polygon. 

Staking

The SEC alleged that Coinbase, in regards to its staking service, operated as an unregistered broker. Additionally, the complaint alleged that Coinbase was violating the Securities Act by offering and selling unregistered securities. 

Read more: Did the SEC just label everything on Coinbase’s front page a security?

Coinbase pushed back against the SEC’s allegations, arguing that it wasn’t making “managerial” efforts to generate returns, and the profit from staking didn’t come from “the efforts of others.” 

The court, however, believes that the SEC has enough of a basis to argue that an investment of money was made, which is — as explained above — a prong of Howey. 

“The Court finds that the SEC has sufficiently alleged that Coinbase offers and sells the Staking Program as an investment contract,” Failla wrote.

Coinbase Wallet

Judge Failla, however, didn’t agree with the SEC’s allegations that the exchange operated as an unregistered broker through its self-custodial wallet offering.

“While the Court finds that the SEC has alleged sufficient facts to show that at least some of the transactions in the tokens it identifies in the Complaint (which can be accessed by customers using Wallet) are “‘investment contracts’ it ultimately concludes that the SEC’s claim as to Wallet fails for the independent reason that the pleadings fall short of demonstrating that Coinbase acts as a “broker” by making Wallet available to customers,” Failla wrote.

The court also found that the 1% fee that Coinbase charges for Wallet’s brokerage services and its customer solicitation through social media isn’t enough for the SEC to argue that Coinbase operated as a broker. 

Coinbase CEO Brian Armstrong said that the court’s finding was a “huge win for self-custodial wallets.”

“This ensures the onchain ecosystem will continue to innovate and create economic freedom around the world,” he said in a post on X.

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