Coinbase files interlocutory appeal in its case against the SEC

Coinbase filed a motion to appeal a judge's decision last month decision made last month, which allowed a lawsuit involving the Securities and Exchange Commission (SEC) and the exchange to proceed without being dismissed.

By filing the interlocutory appeal, Coinbase is claiming substantial grounds for differences of opinion, according to a person familiar.  

SEC Commissioners to lawmakers to courts themselves have been at odds on how the Howey Test applies to transactions, Coinbase's lawyers said in the 27-page appeal. The Howey Test is based on a 1946 U.S. Supreme Court case frequently cited by the SEC, to determine if an asset qualifies as an investment contract and, therefore, a security.

"The application of Howey to digital asset transactions raises hard questions," Coinbase's lawyers said. "That Members of Congress, Senators, and regulatory agencies have divided in answering them bespeaks the difficulty of the subject matter, and the divergent judicial outcomes illustrate the point." 

It is unlikely that an interlocutory appeal, which is filed before the end of a proceeding, will be approved. The SEC tried to file an interlocutory appeal in its case against Ripple last year but was ultimately rejected. 

“Any response will be made in public filings to the court," an SEC spokesperson said in an emailed statement. 

Judge decides not to dismiss

In last month's decision, Judge Katherine Polk Failla of New York disagreed with Coinbase's point that investment contracts need a formal contract. When a customer buys a token on Coinbase, she is not just buying a token, but she is buying into that "token's digital ecosystem," Failla said. 

In its motion, the exchange is specifically appealing whether the SEC has authority over digital asset transactions as investment contracts, even when there is no contract between the issuer and investor, a person familiar with the matter said. 

Coinbase is requesting that Judge Failla grant them permission to appeal. Should the appeal be allowed to proceed, the remainder of the case would be put on hold in the trial court. The exchange would then await a resolution from the Second Circuit "to resolve this conundrum," the same source said. 

Next steps would be discovery, summary judgment, then the case could proceed to trial and be presented to a jury, though the process wouldn't likely start until 2025. The SEC and Coinbase would also have to submit a proposed case management plan before April 19. 

Coinbase was sued by the SEC last year for allegedly operating as an unregistered exchange, broker and clearing agency. The regulator also took issue with Coinbase's staking and wallet services.

Last month, Judge Failla sided with Coinbase on the wallet part and dismissed the SEC's claim. 

Updated on April 13 at 00:35 a.m. UTC time to include additional details from the appeal 

Updated on April 13 at 00:51 a.m. UTC time to include clarification to the next legal steps in the process

Updated on April 13 at 1:59 a.m. UTC time to include comments from the SEC