Court rulings may limit the extent of the SEC’s control within the cryptocurrency sector.

In a pivotal five-hour hearing on Wednesday afternoon, Judge Katherine Polk Failla of the Federal Southern District of New York presided over arguments that hold the key to shaping the regulatory landscape of the $1.7 trillion cryptocurrency industry.

The legal battle involves Coinbase, the largest U.S. cryptocurrency exchange, facing a Securities and Exchange Commission (SEC) lawsuit. Coinbase’s defense contends that the SEC’s claims, accusing the exchange of operating as an “unregistered broker-dealer” in trading unregistered digital assets, should be dismissed.

The SEC, often considered Wall Street’s top regulator, urged Judge Failla to reject Coinbase’s motion, asserting that the exchange blatantly violated securities laws. The SEC pressed for an immediate commencement of discovery proceedings for an impending trial.

Legal experts anticipate a decision from Judge Failla within two to six weeks. The outcome holds significant implications for the future of cryptocurrency regulation in the United States.

If the court favors Coinbase, it could hinder SEC Chair Gary Gensler’s efforts to regulate the crypto industry through enforcement actions. Gensler, since taking office, has initiated over fifty enforcement actions against various crypto entities for alleged rule violations.

The lawsuit accuses Coinbase of functioning as an unregistered broker, exchange, and clearing agency by offering thirteen tokens deemed “securities” by the SEC. Coinbase argues that the tokens on its platform are not securities, as there is no underlying investment contract between issuers and users on the secondary market.

Gensler contends that, apart from Bitcoin and potentially Ethereum, most digital assets qualify as securities under the 1946 Howey Test. The crypto industry challenges this perspective, asserting that the SEC’s registration process does not align with the nuances of blockchain technology.

Judge Failla expressed concerns during the hearing that the SEC’s definition of securities might be overly broad, emphasizing the importance of how the law develops in this case.

The debate echoes in Congress and other legal cases. A previous ruling by Judge Torres in July, determining that XRP was not an illegal security when traded between retail investors, emphasized that digital assets are not inherently securities but could be subject to SEC oversight based on transactional details.

The ongoing legal tussle prompts reflection on the applicability of securities laws drafted eighty years ago to regulate contemporary technologies such as blockchain and artificial intelligence.

Congress is actively monitoring the regulatory discourse, with Senator Cynthia Lummis advocating for the dismissal of the Coinbase suit, arguing that the SEC’s attempt to redefine assets as securities exceeds its authority and hampers technological innovation.

The case is not isolated, as the Supreme Court is deliberating the possible overturning of a 1984 precedent, known as the Chevron Doctrine, which could curtail the regulatory authority of federal agencies, including the SEC, over the cryptocurrency industry. The outcome holds the potential to reshape the regulatory landscape and limit Gensler’s influence over crypto regulations.