This year, some groups have already submitted papers called amicus briefs to help Coinbase in its fight against the regulator.
Last Friday, different groups like legal experts, investors, and blockchain supporters submitted papers called amicus briefs to help Coinbase in its fight against the SEC.
These papers say the SEC’s understanding of an “investment contract” is wrong and doesn’t match established law. They warn that if the regulator wins, it could affect the whole crypto industry.
This year, a few amicus briefs have already been submitted. One from the US Chamber of Commerce said the regulator hurt Coinbase and other businesses.
In June, the SEC took Coinbase to court, saying the exchange didn’t register with them. They also said Coinbase didn’t make sure that digital things they sold were not securities under the Howey test.
The SEC thinks some digital tokens count as investment contracts. This means they give people a chance to make money from other people’s work. So, the SEC thinks they’re its business.
Experts say the SEC’s idea is too wide and could include many things that are not usually seen as securities. This could be stuff like collectibles, regular stocks, and even things like commodities.
They also say the SEC’s focus on the “efforts of others” part of the Howey test is not right. Many digital things don’t need other people’s work to be valuable.
Legal scholars share their opinions
Leading US legal experts from renowned institutions like Yale, Chicago, UCLA, Fordham, Boston, and Widener, have recently shared their opinions, echoing sentiments from earlier this year. They are calling on the court to examine whether tokens traded on platforms such as Coinbase should be considered unregistered securities.
The main question revolves around whether these tokens fit the definitions set out in the Securities Act of 1933 and the Exchange Act of 1934.
These scholars state that when interpreting the term “investment contract” in federal securities laws, the court should stick to its established meaning. They explain that an investment contract typically involves a contractual agreement giving an investor a share of profits, income, or assets.
They argue that for something to be seen as an investment contract, there has to be an expectation of profit or a stake in the business’s earnings, profits, or assets.
They point out that past Supreme Court cases have already applied and refined this principle, assessing whether an offering matches the common understanding of a security. Some arrangements, like shares in a non-profit housing cooperative, were found not to be investment contracts, while others, like payphone sale-leaseback schemes, were considered securities.
These experts highlight that previous court rulings have stressed that the investor must be promised an ongoing interest in the enterprise’s future profits or assets.
Senator Lummis
Attorneys from Jenner & Block, representing US Senator Cynthia Lummis of Wyoming, filed a brief on her behalf last Friday. In the brief, Senator Lummis expressed concerns about the SEC’s authority extending too far.
She believes that the SEC’s actions against Coinbase go beyond its boundaries outlined in the Constitution’s separation of powers. This situation, she argues, obstructs the Congressional oversight of the crypto industry.
Senator Lummis emphasizes that the existing legal framework is inadequate for handling crypto assets effectively. She suggests that new laws are required to align with previous legislative efforts.
Being an influential figure in crypto asset policy, Senator Lummis, along with Senator Kirsten Gillibrand, introduced the Responsible Financial Innovation Act recently. This underscores the urgency of comprehensive legislation for the crypto industry.
Andreessen Horowitz and Paradigm
Prominent venture capital firms, Andreessen Horowitz and Paradigm, both heavily invested in technology and crypto startups, have raised concerns about the wider consequences of the SEC’s actions.
They cautioned that the SEC’s expansive interpretation of “investment contract” could place excessive burdens on established companies and emerging startups alike. This could result in heightened legal intricacies and compliance expenses, curbing innovation and hindering companies from funding their projects through token sales.
Both firms stressed the urgent need for clear and uniform regulatory guidelines. Paradigm recently submitted a separate brief in the SEC’s lawsuit against former Coinbase executive Ishan Wahi, citing similar reasons.
The firms expressed unease that the SEC’s current approach might introduce uncertainty and irregularities in applying securities regulations to digital assets. This could erode the confidence of both investors and entrepreneurs.
They emphasized the importance of a new regulatory framework, specifically established by Congress, rather than having an agency stretch its existing rules beyond their intended scope.
Blockchain Advocates
At the same time, the Crypto Council for Innovation, in collaboration with the Blockchain Association, Chamber of Progress, and Consumer Technology Association, jointly submitted an amicus brief.
Much like Andreessen Horowitz and Paradigm, these advocates highlighted that the SEC’s interpretation of investment contracts for digital assets might introduce confusion and impede innovation.
Their concerns revolved around the idea that the SEC’s broad interpretation could deter future entrepreneurial endeavors, especially in the realms of technology and digital advancements.
Invoking the “major questions doctrine,” they emphasized that administrative agencies shouldn’t assume authority that Congress has intentionally withheld. This underscores the principle that significant policy choices with substantial economic and political implications should be the purview of Congress, not administrative bodies.
The “major questions doctrine” refers to the principle that administrative agencies should not make autonomous decisions on critical policy matters that could have widespread economic and political ramifications.
Instead, the parties argued that a well-defined and carefully tailored definition is essential to ensuring market stability and fostering an environment that supports the growth, innovation, and investment in emerging technologies.
Important: Please note that this article is only meant to provide information and should not be taken as legal, tax, investment, financial, or any other type of advice.
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