Judge Freezes SEC Lawsuit Against Coinbase Amid ‘Conflicting’ Crypto Rulings

The federal judge overseeing the SEC’s lawsuit against Coinbase ruled Tuesday that the case must be paused until an appeals court can weigh in. US District Judge Katherine Failla agreed with Coinbase’s argument that too many courts across the country are coming to different conclusions about the legality of crypto, which should be acknowledged as a novel legal issue. 

The ruling is unquestionably a blow to the SEC, which has argued for years under the Biden Administration that the sale of most crypto assets is plainly illegal under existing securities laws. 

In her decision today, Judge Failla squarely dismissed that position, finding the question of how securities laws apply to crypto to be an “issue of first impression,” meaning one that has never been decided before and that courts must weigh for the first time. 

Because the legality of crypto is such a novel and complicated legal issue, Failla wrote, it is understandable why courts across the country are coming to different conclusions about the technology—a state of affairs that should not continue. 

“Conflicting authority exists regarding Howey’s application to crypto-assets,” the judge wrote, referencing the so-called Howey Test, which the SEC and federal courts have long used to determine an asset’s status as a security. “The application of Howey to crypto-assets raises a difficult issue of first impression for the Second Circuit.”

In short, the Howey test—established in a Supreme Court case in 1946—states that an asset must check off four boxes to qualify as an “investment contract,” a type of security. It basically boils down to investing money (buying an asset) in a common enterprise (like a company) with the expectation that you’ll make a return on that investment through no effort of your own. Stocks fit neatly into that category. Judge Failla, evidently, thinks it’s not a settled matter when it comes to crypto tokens—so on to the Second Circuit it goes.

The Second Circuit Court of Appeals, one of thirteen federal appeals courts in the United States, will now decide whether it will agree to hear the SEC’s case against Coinbase on interlocutory appeal. If it does hear the case, a judge on that powerful circuit will then determine if it should proceed in Judge Failla’s courtroom, or be dismissed based on underlying issues. 

In order to grant Coinbase’s motion for interlocutory appeal, Judge Failla had to find that an immediate appeal of the case midway through its proceedings would materially advance the likelihood that it could be dismissed. She did, writing that today’s granting of interlocutory appeal “could result in dismissal of the bulk of the SEC’s claims against Coinbase.”

Naturally, the crypto legal community expressed great enthusiasm about the ruling this afternoon, with some experts anticipating that it could have far-reaching implications.

“Today’s ruling in SEC v. Coinbase marks a potentially pivotal moment in the law related to digital assets,” Amanda Tuminelli, chief legal officer at crypto lobbying group DeFi Education Fund, said in a statement shared with Decrypt. 

“For the first time, a federal circuit court will have the chance to address the controlling legal question of the extent of the SEC’s statutory authority over digital assets,” she continued. “If the Second Circuit agrees to hear Coinbase’s appeal, it will have the opportunity to provide legal clarity the industry has been asking for.”

Bill Hughes, senior counsel at Ethereum software giant Consensys, argued that Judge Failla’s ruling today in Coinbase’s case should quickly be applied to similar, pending crypto lawsuits across the country. 

“Every enforcement case brought by the SEC where this issue would largely determine the outcome should be stayed,” he said in a post on X (formerly Twitter). 

The SEC did not immediately respond to Decrypt’s request for comment regarding its reaction to today’s ruling.

The potential shake-up to the SEC’s crypto policy comes just weeks before Donald Trump is set to retake the White House and clean house on President Joe Biden’s crypto-hostile administration. Trump’s selection of former SEC commissioner Paul Atkins as the agency’s next chair was widely seen as a very pro-crypto move that was supported by industry leaders. 

How a pro-crypto SEC and DOJ under the Trump Administration will choose to navigate pending federal lawsuits against numerous American crypto firms remains, for now, an open question.