Will a judge dismiss the SEC's case against Coinbase? Experts have differing views.

Experts have mixed feelings on the chance that a New York judge could toss a case brought by the Securities and Exchange Commission against Coinbase. 

Last week, New York District Judge Katherine Polk Failla posed questions to both the SEC and the exchange for over four hours during oral arguments. Coinbase was sued by the SEC last year for allegedly operating as an unregistered exchange, broker and clearing agency. The regulator also took issue with Coinbase's staking and wallet services.

Coinbase has pushed back on the SEC's claims, arguing for the case to be dismissed and accusing the regulator of taking a "regulation by enforcement approach." 

Judge Failla could decide to dismiss the case, experts say. Bloomberg Intelligence senior litigation analyst Elliott Stein put the chances of Coinbase beating the SEC at 70 percent in a post last week.  

"Our Thesis: Coinbase is 70% likely to beat the SEC, if not outright on this motion, then later," Stein wrote. "Even if the case survives, it likely reaches the Supreme Court, which we think will narrow Howey," Stein wrote, referring to test that's based on a 1946 U.S. Supreme Court case the SEC often cites in determining whether or not an asset is a security. 

Going into the hearing, Stein said he thought Coinbase had a good chance of winning a dismissal regarding trading of assets on the platform, but less so in terms of the staking and wallet claims lodged by the agency. 

"Coming out of the hearing, I thought Coinbase did a lot better than I anticipated," Stein said in an interview. 

Judge Failla grilled the SEC during last week's hearing, asking its lawyers direct questions about what constitutes a security and expressing concern the agency may be too broad in its definition of securities.

Judge Failla was skeptical of the SEC's theory on what constituted securities, Stein said, but added that Coinbase also made compelling arguments on the wallet and staking claims. 

Tough questions

Stein said he could see dismissal, in part due to Judge Failla's questioning during last week's hearing. 

"Her questions were very thorough and tough on both sides, but she did express concern with the SEC's theory of what constitutes an investment contract," Stein said. 

On why Stein says there is specifically a 70 percent chance, he said he feels confident. 

"We try not to make any 50/50 calls," Stein said. "Sixty percent would suggest that it's a very close case. I think parts of this are close, but I'm quite confident on the trading claims and the broker claims that those will be dismissed, and I think there's good reason to believe that the staking claims will be dismissed too." 

But the case could go on

Others say the case will go on, and if the judge denies Coinbase's motion, then it would go onto discovery. At the end of discovery, both the SEC and Coinbase could bring a motion for summary judgment. If the judge isn't convinced, then it would proceed to trial and be presented to a jury, but that wouldn't likely happen until 2025. 

It is a very low bar for the SEC to plead a claim that is enough to then get to discovery, said Samson Enzer, partner at Cahill Gordon Reindel LLP. Enzer is a former federal prosecutor in the U.S. Attorney's Office for the Southern District of New York, the district where the Coinbase case resides. Enzer also represents Coinbase, though he is not representing them in this specific lawsuit. 

"I would not expect the judge to dismiss the case at this stage," Enzer said. "That's not to say she won't dismiss or trim the case after discovery, either at summary judgment or trial, but I don't expect her to dismiss the case at this stage."

The question right now in front of the court is, assuming what the SEC said is true, is there enough there to make a viable claim to then move forward with discovery, Enzer said.

It would be hard for Judge Failla to dismiss the case at this stage, Enzer added.

If Judge Failla decides to dismiss any of the claims, that would be huge for the crypto industry, Enzer said. Failla's decision would have persuasive authority but would not be binding, he added. Other district courts could disagree with her decision, Enzer continued.

What about Binance

Binance also faced the SEC in a D.C. court on Monday in an effort to have its lawsuit dismissed. Judge Amy Berman Jackson is overseeing that case. 

The SEC sued Binance Holdings and its former CEO Changpeng Zhao in June, accusing the crypto exchange of lying to customers, failing to restrict U.S. investors from accessing Binance.com, misdirecting capital to separated investment funds owned by Zhao, and operating as an unregistered exchange. The SEC also said 12 tokens on the exchange were securities, including BNB and BUSD. 

"I would bet, but obviously this is speculation, but I think from her comments at the oral argument, I would bet that she at least dismisses the SEC's claims that BUSD stablecoin was offered or sold as a security. The SEC's allegations on that are remarkably weak," Enzer said, and added that the judge honed in on that. 

The rest of the claims will go on to discovery, Enzer said. Binance is also a client, though not for this particular case, he said. 

For both cases, both judges are taking very seriously the arguments presented by the defendants, said Daniel Davis, partner at Katten Muchin Rosenman LLP and formerly general counsel at the Commodity Futures Trading Commission. Davis is also listed as an attorney for BAM Management U.S. Holdings for the case between Binance and the SEC. 

"That's clearly a good sign," Davis said. "I can't predict what the judges are going to do, but certainly appreciate that both judges seem to be giving very serious consideration to the arguments and what they might mean." 

Davis said it is possible for Binance or Coinbase or both to be dismissed. 

"I think it's clearly possible that certain claims could be dismissed," Davis said. "It's very hard to predict."

Binance has a lot of claims that are not part of Coinbase's case, Bloomberg's Stein said. 

"It's definitely a wider reaching case," Stein said, but noted that Judge Jackson echoed similar concerns as Judge Failla of the SEC's definition of securities being too broad. 

What's next

Stein says he expects Judge Failla to make a decision on Coinbase in a matter of weeks, given how much thought Failla has given to the case. 

There are now three major cases between the SEC and other crypto exchanges including Binance, Coinbase and Kraken, and those are all happening in different courts throughout the country. 

"The likelihood that these then get appealed and then you might have some variation in how the federal appeals courts rule — this makes it all more likely that this issue eventually makes it to the Supreme Court," Stein said.