Is This How Coinbase Will Argue Its Case Against the SEC?
Is This How Coinbase Will Argue Its Case Against the SEC?
Part I - The hearing: Bitcoin gets some airtime during oral argument
In our previous post, we shared our reactions to the SEC v. Coinbase decision. We argued that denying the motion was the right decision, but that decision appeared to have been built on a shaky foundation. Coinbase has responded by filing a brief asking for the Court’s permission to seek an interlocutory appeal. We, of course, don’t have a crystal ball as to what will happen there, but the more likely scenario seems to be that it will be denied as predicted by MetaLawMan on X: “Interlocutory appeals are almost always long shots.” Either way, what we will focus on is how we believe Coinbase (or any other similarly situated entity) will argue its side when this issue is fully litigated.
Today, we are launching a mini two-post series about Bitcoin. Then, next month, we plan to cover collectibles and commodities. Let’s dive in, shall we:
One can learn quite a bit by following what Coinbase is saying on X. One of the most revealing clues leading to Coinbase’s strategy comes from Paul Grewal, Coinbase’s Chief Legal Officer:
To be crystal clear, we do NOT agree that Bitcoin is NOT a security, but the SEC does, and that stance has all the potential to be really problematic for them because it led to a decision with a shaky foundation. When the issue of secondary market crypto purchases is fully litigated, we believe the essence of Coinbase’s (or any other similarly situated party’s for that matter) argument will likely be an iteration of Paul Grewal’s post:
If Bitcoin is NOT a security, then why should all these other coins be?
Is this wrong? The answer is nuanced, but there is certainly an argument here. The issue started with the oral argument on January 17, 2024…
The Hearing
You may recall that the oral argument lasted five hours, yet, the most important question was not asked: “Is purchasing crypto an investment?” Those five words hold the keys to the kingdom of Howey, but let’s put that aside for that moment. The hearing transcript is out (available on Pacer), and it contains clues as to why, by taking the position that Bitcoin is not a security, the SEC may have backed themselves into a corner. Here is the pertinent exchange:
COURT: I'm just trying to figure -- I would have thought that everybody buying a token on Coinbase hopes one day that that token will appreciate in value, but perhaps you've seen tokens where there was no ecosystem. And if so, if it's possible, could you give me an example of one of those, where you looked at it and said this does not qualify.
SEC: I believe that the commission has taken the position that the Bitcoin token is not a security. I think that is -- and I believe that you can purchase Bitcoin on Coinbase's platform.
COURT: Is that because it's effectively currency, it's a replacement for fiat currency or something else?
SEC: I think the way to look at that is, again, to come back to your Honor's question about the ecosystem, there's no ecosystem behind it. And I think that's the easiest way to look at it. Because the way we view these 13 particular tokens is that you are buying the token and the totality of the inducements. If nobody is inducing anything, then you can't be buying that in a sense. And I think you see in instances like Bitcoin, it lacks that centralized function. (emphasis added)
So, we learned a few things from just this brief exchange:
The Court was inclined to think that the majority of crypto purchases were done with profits in mind (barring any hard evidence to the contrary, we agree).
The SEC is clearly taking the position that there is no ecosystem behind Bitcoin.
The SEC also seems to be taking the position that there is no inducement for people to buy Bitcoin.
#2 was an opportunity for Coinbase to counterpunch, and they did:
Bitcoin has every bit the ecosystem of these other tokens. There are community groups, there are chat groups, there are validators, there are support groups. Bitcoin is an ecosystem just like all of the others, and that won't do as a limiting principle, as the commission's own actions we think make clear.
Re: #3, let’s first look at the definition of the word induce. This one comes from Merriam-Webster:
in·duce in-ˈdüs -ˈdyüs
transitive verb
1a: to move by persuasion or influence
b: to call forth or bring about by influence or stimulation
People trying to persuade or influence other people to buy Bitcoin? One doesn’t need to be a detective to find those as there is an abundance of Bitcoin advocates and promoters. One such advocate who has been vocal lately is Rajat Soni, a CFA who describes himself as “the Bitcoin guy.” Here are some of his more than 39,000 posts blasted to his 88,000+ followers:
Comparing Bitcoin to Apple, Microsoft and Amazon? Sold all his stocks to buy Bitcoin? Predicting a 30% annual growth rate over the next 10 years? If these don’t sound like inducements, then we would sure like to know what the SEC means when they say, “If nobody is inducing anything …” To us, it certainly sounds like Rajat Soni is trying to persuade people to do something, and there are a lot of Rajat Sonis out there…
One can perhaps disagree with us on these and agree with the SEC; after all, it comes down to how the word “ecosystem” and “inducements” are defined. Having said that, there is an even bigger problem for the SEC; their own arguments are internally inconsistent. The SEC stated:
Now, what is the enterprise here? What is distinguishing these 13 tokens from a collectible? The fact is the enterprise, and what is the enterprise? It's the network. It's the ecosystem. You are buying into that ecosystem with your token. The token is the key that gets you into this ecosystem. Without the token, you can't get in. The token would be worthless without the ecosystem; it depends on it. (emphasis added)
Now, let’s put these arguments together and apply some rudimentary logic:
There's no ecosystem behind [Bitcoin]. [SEC Statement]
The token would be worthless without the ecosystem. [SEC Statement]
Therefore, Bitcoin is worthless. [Logical Inference]
Bitcoin is clearly not worthless! As of the time of this post, Bitcoin trades in the mid-60,000s; its market capitalization is roughly half of the entire crypto market.
Important side note:
For those of you, who would like to remind us that Jamie Dimon said “Bitcoin is worthless,” we already covered that in our sister blog F27. The reconciliation is subtle, but simple:
Bitcoin has value, but it cannot be valued.
So, obviously definitional issues are our bread and butter, but this is more than that. It’s not just about what “ecosystem” and “inducements” mean. This is now a logic issue, pure and simple. The SEC’s own statements lead to a conclusion that is not reality. Of course, the root problem lies with the incorrect premise that there is no ecosystem behind Bitcoin, because there most certainly is. It will be most interesting to see how the SEC attempts to defend its position that there is no ecosystem behind Bitcoin. More litigation is coming, after all.
Did any of this matter? Obviously the SEC survived the motion to dismiss, so not yet. However, that decision created more language that Coinbase is expected to attack, which we will discuss in our next post.
