Recent developments in the U.S. SEC’s proceedings against major crypto players signals pro-industry policy shift Recent developments in the U.S. SEC’s proceedings against major crypto players signals pro-industry policy shift

In both Canada and the U.S., those in the crypto industry have been somewhat reluctant participants in a long dance with regulators as to which of them can assert jurisdiction over crypto-related activity and how that jurisdiction should be exercised. While the crypto industry appears to be thriving, uncertainty over how crypto is to be regulated, and by whom, has cast a shadow over the industry. This past January, two recent U.S. decisions concerning cryptocurrency exchange Coinbase Global Inc. (Coinbase) created the prospect that there might soon be some clarity around these issues. Coinbase faced the same opponent in both cases — the Securities and Exchange Commission (SEC) — but the ultimate legal issue in each is distinct.

In parallel, the ascension of a new president and administration in the U.S. has been accompanied with an apparent paradigm shift: President Trump has indicated his administration will be the most crypto-friendly administration to date, and that federal regulators will administer their regulatory authorities to reflect this. Coinciding with this shift, Coinbase indicated on February 21, 2025, that the SEC has agreed in principle to dismiss its enforcement action against Coinbase. The SEC will formally vote on the issue tomorrow. Concurrently, the SEC has also concluded its investigations into other players in the crypto asset industry, such as OpenSea and Robinhood.

These developments are being welcomed by the industry. Nevertheless, the result is U.S. federal appellate courts will not have the chance to consider the application of U.S. federal securities laws to digital assets as a matter of law. Unfortunately for legal observers, unless and until regulatory clarity is provided by the SEC itself or through targeted legislation, the questions about whether and to what extent U.S. securities laws apply to digital assets, will remain unanswered.

In any event, it remains to be seen whether Canadian regulators will follow the direction set by the SEC, or continue to press forward with their regulatory approaches to digital assets. Given that the regulatory landscape in Canada is equally murky, a clear regulatory framework that explicitly addresses digital assets would certainly be welcome.

SEC’s enforcement action against Coinbase being dismissed — significant appeal likely abandoned

Following a complaint [PDF] dated June 6, 2023 (nearly a year after Coinbase petitioned the SEC for rulemaking, and after Coinbase made attempts to register with the SEC as a broker-dealer), the SEC commenced an enforcement action against Coinbase (Coinbase Global, Inc. and Coinbase, Inc.) in the federal court in the Southern District of New York.

The SEC alleged that, since at least 2019, Coinbase has violated federal securities laws by operating as an unregistered broker, exchange, and clearing agency in connection with 13 specific crypto-assets Coinbase offered on its platform. The SEC also alleged that Coinbase has been engaging in an unregistered securities offering through its staking-as-a-service program in violation of federal securities laws.

On August 4, 2023, Coinbase brought a preliminary motion for judgment on the pleadings, seeking to dismiss the SEC’s case against it. On March 27, 2024, Judge Failla of the federal court in the Southern District of New York denied [PDF] Coinbase’s motion, finding that the SEC allegations plausibly supported their claim that Coinbase operated as an unregistered intermediary of securities, and allowing the SEC’s case to proceed.

As acknowledged by Judge Failla, the SEC’s ability to prevail on any of its claims depends in large part on the threshold question of whether any of the transactions involving the 13 identified crypto-assets qualify as “securities” under federal securities laws. Judge Failla went on to find that the SEC had pleaded adequate facts (if accepted as true, which is the standard on this preliminary motion), that that these transactions constituted “investment contracts” under the three-part test set out by the U.S. Supreme Court in SEC v. W.J. Howey Co.

Under Howey, an investment contract is a contract, transaction or scheme whereby a person (1) invests their money (2) in a common enterprise (3) is led to expect profits solely from the efforts of the promoter or a third party. Coinbase did not dispute the first element of the test, and Judge Failla found that the SEC had adequately pleaded that “that purchasers of certain crypto-assets on the Coinbase Platform and through [Coinbase’s] Prime [service] invested in a common enterprise and were led to expect profits solely from the efforts of others, thereby satisfying the Howey test for an investment contract.”

Judge Failla rejected nearly all of Coinbase’s arguments regarding the Howey test and its other challenges to the SEC’s enforcement action. However, she did grant judgment in Coinbase’s favour on the question of whether it acts as an unregistered broker through its wallet service.

Earlier this year, Judge Failla certified for an interlocutory appeal of her prior order, allowing the SEC’s case to proceed against Coinbase. Accordingly, on January 21, 2025, Coinbase filed its petition [PDF ] for leave for appeal in the U.S. Court of Appeals for the Second Circuit (seen as one of the most influential federal appellate courts in the country), aptly noting that “[t]here is no more pressing issue in securities law today than the scope of the [SEC’s] authority to regulate secondary trades of digital assets”, and that “[h]earing this appeal will allow the Court to clear away the court that currently hangs over the cryptocurrency market.” This appeal would have been the first time a U.S. federal appellate court weighed in on the critical issue of whether transactions involving crypto assets can be deemed to be “investment contracts” under the Howey test and therefore can be regulated under the federal securities law.

Earlier this month, the SEC sought [PDF] a one-month extension from the Court to file its responding materials. The SEC’s motion foreshadowed the dismissal — it noted that the SEC’s Acting Chairman Mark T. Uyeda had recently “launched a crypto task force dedicated to helping the Commission to develop the regulatory framework for crypto assets”, and that the “crypto task force’s work may affect and could facilitate the potential resolution of both the underlying district court proceeding and potential appellate review”.

With the SEC’s dismissal of its underlying action against Coinbase now announced, the appeal likely will not proceed any further, meaning that calls for clarity on the applicability of securities law over digital assets will not be answered by federal appellate courts anytime soon. 

Coinbase’s petition to the SEC for crypto rulemaking being reconsidered

In July 2022, Coinbase petitioned [PDF] the SEC to develop rules clarifying how and when federal securities laws apply to digital assets like cryptocurrencies and tokens. Coinbase argued that the existing securities law framework does not account for certain unique attributes of digital assets, which make compliance economically and technically infeasible. It also claimed that the SEC has exacerbated these difficulties by failing to articulate a clear and consistent position about when a digital asset is a security and therefore subject to federal securities laws in the first place.

In December 2023, the SEC denied Coinbase’s rulemaking petition with a single-paragraph decision, disagreeing that the current legal and regulatory framework was unworkable, and indicating its preference of gathering additional information through incremental action (or, as some in the industry would call it “regulation by enforcement”) before engaging in more far-reaching rulemaking.

Coinbase’s U.S. subsidiary (Coinbase Inc.) petitioned the U.S. Court of Appeals for the Third Circuit to review the SEC’s denial and require the SEC to engage in notice-and-comment rulemaking. The Court recently released its decision [PDF] on January 13, 2025, finding the SEC’s order was “arbitrary and capricious” and insufficiently reasoned. In a partial victory for Coinbase, the Court remanded the petition to the SEC for a more complete explanation (but stopped short of ordering it to engage in rulemaking).

Given that the underlying enforcement proceeding against Coinbase is coming to an end, it remains to be seen what will become of this petition. As the SEC has indicated that its task force is looking to assist the SEC with developing a framework for digital assets, it seems unlikely that this case (which in essence seeks to force the SEC to do exactly that) will move forward.

Implications for Canadian regulatory environment

The SEC has moved quickly to shift its stance towards the crypto industry under President Trump’s administration, including by creating the aforementioned crypto task force led by Commissioner Hester Pierce, described as being “dedicated to developing a comprehensive and clear regulatory framework for crypto assets”. Notably, Ms. Pierce recently stated that most meme coins are likely not within the SEC’s jurisdiction. However, Ms. Pierce is just one of five SEC commissioners, and the policy direction will not likely be clarified until the new chair is confirmed, and the new administration’s priorities are formally outlined.

These recent developments involving Coinbase and others suggest substantial change — potentially leading to greater regulatory clarity, crypto-specific legislation, and shifting enforcement priorities — in the coming months and years. As we have written about extensively in the 2024 Osler Legal Outlook, Canadian regulators are also wrestling with who has authority to regulate the crypto industry, and on what basis. The question of whether crypto tokens are securities is also likely to turn on whether they are investment contracts (within the meaning of provincial securities legislation), and the test for that is similar to the Howey test in the U.S. As such, it is yet to be seen how the U.S. developments may impact how crypto is treated in Canada as well.