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New York District Judge Katherine Polk Failla on Wednesday opened an investigation in court into whether tokens listed on the Coinbase exchange are securities.
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Coinbase was sued by the SEC in June for allegedly operating as an unregistered broker, dealer, and exchange. Coinbase denied the allegations, arguing for the dismissal of the case and accusing the regulator of adopting a “regulation by enforcement” approach.
The exchange attorney William Savitt explored how securities are defined and pointed out the difference between “investing in Beanie Baby Inc. and buying Beanie Babies.”
In its June complaint, the SEC said that tokens such as SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO are securities.
Savitt made an explanation about Coinbase
Savitt noted that Coinbase does not argue that tokens listed on its website can never be considered securities.
“We do not accept the view that token transactions can never be investment contracts,” he said, adding that the SEC did not present any allegations in its case that meet the definition of an investment contract.
He also said that Coinbase agrees with the SEC that a formal contract signed by the buyer is not necessary to create an investment contract. However, he still said that token buyers reading technical reviews and other information about token projects does not mean they are buying investment contracts.
Savitt also rejected the SEC’s thesis that token sales on Coinbase should be considered investment contracts because token projects may have made certain promises to buyers and buyers may have bought tokens in the hope of a price increase.
“There needs to be a statement intended to convey an enforceable promise,” Savitt said. “That is the irreducible minimum of what could be considered an investment contract.”
The Coinbase attorney said that what really distinguishes blockchain tokens from securities is that a person who buys a stock, whether directly from an issuer or on a secondary market, receives all the rights that ownership of those securities confers, but that is not the case for tokens.