The Blubber

Coinbase, $COIN, said buying cryptocurrency on an exchange was more like collecting Beanie Babies than investing in a stock or bond, per Bloomberg.

Coinbase has presented arguments for the dismissal of a Securities and Exchange Commission (SEC) lawsuit alleging the sale of unregistered securities. William Savitt, a Coinbase lawyer, asserted before US District Judge Katherine Polk Failla that tokens traded on the platform do not fall under SEC jurisdiction because purchasers do not acquire rights akin to stocks or bonds.

Savitt drew a comparison, stating, "It’s the difference between buying Beanie Babies Inc. and buying Beanie Babies." The classification of digital tokens as securities has stirred disagreement among courts. A Manhattan federal judge ruled in July that Ripple Labs' XRP token sales on an exchange were not under SEC jurisdiction. However, another judge in the same month reached the opposite conclusion in the SEC's case against Terraform Labs Pte.

Coinbase is urging Failla to align with the Ripple decision in dismissing the SEC's lawsuit. The judge concluded the hearing without issuing a ruling. Beanie Babies resurfaced during the hearing when Failla expressed concerns that the SEC's stance might extend to the regulation of collectibles, drawing a parallel between the 1990s Beanie Babies collecting craze and the world of crypto.

SEC lawyer Patrick Costello argued that purchasing a collectible like a baseball card does not entail buying a stake in the producing enterprise. In contrast, he contended that tokens on Coinbase involve investment in the network behind them, emphasizing the inseparability of the two.

The SEC filed the lawsuit against Coinbase in June, alleging that the exchange evaded rules by enabling users to trade numerous crypto tokens considered unregistered securities. The regulator cites a 1946 Supreme Court decision defining a security as an "investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others."

During Wednesday's hearing, SEC lawyers pressed Failla to reject Coinbase's arguments, asserting that the exchange fosters the belief among customers that certain digital assets will appreciate in value. Savitt acknowledged this perception but argued that regulatory authority has limits and should not extend beyond the realm of securities.

Bloomberg Intelligence senior litigation analyst Elliott Stein, present at the hearing, predicts that Failla will likely support Coinbase in dismissing the SEC suit. However, if the case proceeds, Stein estimates Coinbase faces up to a $1 billion liability if unsuccessful. The case is Securities and Exchange Commission v. Coinbase Inc., 23-cv-04738, US District Court, Southern District of New York (Manhattan).