By David Golden and Vincent J. Nolan III
Judge Katherine Polk Failla from the U.S. District Court for the Southern District of New York has paused the Securities and Exchange Commission’s (SEC) lawsuit against Coinbase, Inc. This rare move will allow Coinbase to appeal Judge Failla’s previous decision to deny Coinbase’s efforts to dismiss the SEC’s lawsuit.
In April 2024, Judge Failla, applying the Howey test used by courts to determine whether cryptocurrency transactions should be classified as investment contracts under federal securities laws, had denied Coinbase’s motion to dismiss the SEC’s complaint and allowed the suit to proceed, accepting (at that stage) the SEC’s argument that “Coinbase’s business of intermediating transactions in cryptocurrency amounted to the operation of an unregistered brokerage, exchange, and clearing agency in violation of federal securities laws.”
But on January 7, 2025, Judge Failla recognized that the varying decisions in recent years regarding application of the Howey Test (including the Ripple and Terraform cases) demonstrated fundamental difficulties in applying Howey to crypto transactions. Central to this decision was Coinbase’s argument that the tokens at issue are akin to commodities because they have no inherent value outside of the “ecosystem” in which they were issued or consumed and cited examples of other such commodities, including carbon credits, emissions allowances, and even expired Taylor Swift concert tickets. Judge Failla acknowledged the court’s use of the “digital ecosystem” in the application of the Howey test, noting that her own prior decision denying Coinbase’s motion to dismiss had concluded that “crypto-asset transactions met the ‘common enterprise’ prong of Howey because crypto-asset purchasers’ ability to profit depends on the development and expansion of the ecosystem.” Judge Failla ultimately agreed with Coinbase at least to the extent that “[t]here is indeed substantial ground to dispute how Howey is applied to crypto-assets and the role of the surrounding digital ecosystem in that analysis.”
This decision does not bring the clarity that many seek in the ongoing battle between the SEC and the crypto community. However, the “pause” could give much-needed time for Congress to enact new legislation, for a circuit court to rule on the application of the Howey test, for the Trump Administration to issue new executive orders, or for the new SEC Chairman to settle the case and provide further guidance on the issue.