Coinbase’s Interlocutory Appeal Granted

A New York district court judge has granted Coinbase’s request for an appeal, pausing the U.S. Securities and Exchange Commission’s (SEC) lawsuit against the exchange.

U.S. District Judge for the Southern District of New York, Judge Katherine Polk Failla, approved Coinbase’s motion for an interlocutory appeal in an order filed on Tuesday. Interlocutory appeals, which occur before a final judgment is made, are typically rare. The case will be sent to the Second Circuit Court of Appeals, which is expected to take it on, according to sources.

The SEC filed a lawsuit against Coinbase in 2023, claiming it was operating as an unregistered exchange, broker, and clearing agency. The regulator also raised concerns about Coinbase’s staking and wallet services. Judge Failla dismissed the SEC’s claims regarding the wallet portion and sided with Coinbase.

Coinbase initiated its appeal in April, citing significant differences of opinion among SEC Commissioners, lawmakers, and the courts about the application of the Howey Test to transactions, as outlined in their 27-page appeal. The Howey Test is derived from a 1946 U.S. Supreme Court case and is often used by the SEC to determine whether an asset qualifies as an investment contract, thus categorizing it as a security.

In her order, Judge Failla stated, “As explained in the remainder of this Opinion, the Court certifies the Order for interlocutory appeal under Section 1292(b) because it presents a controlling question of law regarding the reach and application of Howey to crypto-assets, about which there is substantial ground for difference of opinion, and the resolution of which would advance the ultimate termination of the SEC’s enforcement action.”

She emphasized that there is a “substantial ground for difference of opinion” due to “conflicting authority” on Howey’s application to cryptocurrencies, noting that this represents a complex issue of first impression for the Second Circuit.

Judge Failla also pointed out that these conflicting decisions require the Second Circuit’s review:
> “Although the Court does not appreciate, and will not co-sign, Coinbase’s efforts to cast aspersions on the SEC’s approach to crypto-assets … the fact remains that these conflicting decisions on an important legal issue necessitate the Second Circuit’s guidance,” stated Failla.

Coinbase’s Chief Policy Officer, Faryar Shirzad, remarked that Judge Failla’s order is a significant setback for the SEC. “Another blow against the current SEC’s leadership’s efforts to sow continued uncertainty and confusion,” Shirzad commented on X. He also expressed gratitude to Judge Failla for permitting the interlocutory appeal.

The SEC has declined to comment on the matter.