SEC struggled to argue Beanie Babies aren’t securities — Crypto lawyers


The United States securities regulator apparently failed to effectively argue the difference between Beanie Babies and securities during a recent hearing in New York — one of a few signs that could bode well for Coinbase in its defense, according to lawyers. 

The crypto exchange has been trying to have a lawsuit from the U.S. Securities and Exchange Commission (SEC) against it dismissed by a New York court, with oral arguments recently heard over a five-hour hearing on Jan. 17.

Reflecting on the proceedings in a post on X (formerly Twitter), Hogan & Hogan law firm partner Jeremy Hogan recounted that part of the hearing saw Judge Katherine Polk Failla remark that the agency’s test to determine securities would lead to a class-action lawsuit against the seller of Beanie Babies.

Hogan said the regulator then tried to distinguish Beanie Babies from securities to the judge but “for the most part fails because the truth is that, for the SEC, a Beanie Baby IS a security.”

“Today’s [Coinbase] hearing revealed a key flaw in the SEC’s legal theory: it turns nearly every asset on the planet into a security,” remarked Jake Chervinsky, legal chief of crypto venture capital firm Variant.

Failla seemed to see it the same way after reportedly describing the situation as a “specter of collectibles being regulated by the SEC,” according to Chervinsky.

“After hours and hours, this much remain clear: the SEC continues to claim broad authority over all investments while offering no limiting principle to its definition of investment contract,” reflected Coinbase legal chief Paul Grewal in a Jan. 18 post on X.

Lawyers not confident in major questions doctrine argument

Meanwhile, part of the hearing was dedicated to arguments on the major questions doctrine — a 2022 U.S. Supreme Court ruling saying agencies should delegate authority to Congress on certain matters. Many crypto firms, including Coinbase, have attempted to use this as a reason to dismiss their respective SEC lawsuit.

However, securities lawyer James Murphy said in a Jan. 17 X post that Failla seemed uncomfortable with the idea of dismissing the case based on the Supreme Court ruling.

On the other hand, Chervinsky said the judge “noted problems with the SEC’s case” in light of Senator Cynthia Lummis’ amicus brief that outlines Congress’ current debate on how to regulate crypto, which supported Coinbase’s motion to dismiss.

Related: US GAO recommendations to SEC before spot Bitcoin ETF approval revealed

Failla closed the hearing with a clear statement that she was not deciding on Coinbase’s dismissal motion that day. It’s possible she could issue a partial dismissal.

“My guess (and it’s just a guess) is she is going to allow the case to go forward to discovery, like the Ripple case,” Murphy said.

He predicted Failla would decide on the motion to dismiss within the next three months and that Coinbase would “ultimately win the case in the end.”

The SEC didn’t immediately respond to Cointelegraph’s request for comment.

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