Wow! I Went into the SEC versus Coinbase lawsuit hearing today January 17th, 2024 honestly expecting that the SEC would come prepared with an incredible argument for why the 12 tokens that they listed were a security and coinbase I Thought was going to have a hard time defending against that in this video. I'm going to give you my opinion in terms of who won this case right now, the motion at hand, the decision at hand for the judge is whether or not to let the case continue or to dismiss the case, to decide the case based on the pleadings thus far, or to throw the case out. The judge has indicated she is going to wait to make a decision and she is not going to rule at the moment. So uh, without the judge ruling at the moment, we are going to go through some of the summaries and some of the big cases here and we are going to come up with a conclusion: I Want to be clear: I Personally think the Judge already has her decision I Just think she needs to structure her decision properly I think she was sitting there listening writing her decision and so I think this case is already decided I am 90% certain which way this case is going to go though.

I could be totally wrong I'm just a neutral person who looked in from the outside going okay I think the SEC is going to get rolled here and let's just say I was surprised. So what happened? Okay, here's the gist of what happened: I'm going to give you the summaries and we'll go into some more details. First, there were multiple cases where the judge argues what makes crypto not its own thing, why is it a security and the SEC argues. Well, there's this thing called the Hoe test.

Okay, the Hoe test comes from a lawsuit. the SEC versus hoe Co. Okay, and there are four components to the Hoe test. The Hoe test makes it clear that something is a a security when you provide an investment of money in a common Enterprise with the expectation of profit to be derived from the efforts of others.

But there are two parts of this that are a little complicating. Uh. one. There's the actual how we test as to whether or not something is a security and then you have to evaluate well.

Is it a primary transaction we're talking about or a secondary transaction we're talking about? So I don't want to lose you I want to make this as simple as possible. If Apple Apple comes to you and says yo so we or or let's do a different example. Elon Musk comes to you and says I'm going to sell you shares of SpaceX and I own SpaceX right? and he is SpaceX He's representing SpaceX in this case. So SpaceX goes directly to you and says here are shares of SpaceX Well, that is a primary issuer transaction which is regulated by the SEC.

Now let's say you own coinbase shares or um, uh, SpaceX shares and they're this laptop or whatever right? This laptop represents those SpaceX shares and I meet you in an alley somewhere and you're like yo I want to sell you some SpaceX shares? You want my SpaceX shares? I'm like sure, I'll give you this handgun for them or these Donuts or money whatever right? You're like deal and we shake hands and we exchange the shares for some exchange of value that could still be a security. This is still potentially a security, but that's considered a secondary transaction which is an exempt transaction ction from the purview of the SEC like the SEC isn't in the alley policing you going Up Up Up up. you need to follow the rules. That's really important because Coinbase is making this argument that whoa whoa whoa whoa.

First of all, first of all, even even if it is a security, we're just dealing in secondary transactions because different people's wallets are connecting and different people's wallets connecting are not us representing an issuer like like SpaceX and helping them sell shares. Different people's connecting wallets connecting has has nothing to do with us and the issuer. That's one of the arguments that Coinbase makes. The second argument that Coinbase makes is that the Hoe test and all of this is summarized on Ec.com By the way, go To Ea.com It's totally free.

I post a lot of my research there and and commentary on there. but anyway. uh, it's my website I Write it. Okay, so anyway.

uh and again, it's totally free. It's going to be free forever. So the Hoe test has a lot to do with investment contracts. Now how do we know that? Ah, Okay, well, that's really simple.

So all you have to do is Google SEC verse hoe and uh hoe Co the Howie company. Okay, and when you Google that you could find the actual case law. This is an old 1946 case law. and what's really important in this is the phrase investment Contract.

Upon the facts of the case, an offering of units in a Citrus Grove develop velopment coupled with a contract for cultivating that Grove was an investment contract within the meaning of the 1933 Securities act. Ah, okay. Interesting. So that is where Coinbase's strongest argument comes from: Wait a second.

Even if something is an investment of money into a common Enterprise with the expectation of profit to be, arrive from the benefit of others, Wait a second. Is there a stapled investment contract to that? For example, when you buy a share of Apple you have your name put on a uh uh, a cap table somewhere, a transfer agent says Okay Kevin Smith or whatever. You now own these shares of Apple and as a result of that, you have potentially the right to vote, the right to dividends, the right in liquidation of the company. In the event the company liquidates, you have the right to residual assets, You have the right to sue.

You have a lot of rights that come with your ownership in that company. Coinbase makes the argument that the tokens that Coinbase threw in their lawsuit which I have a screenshot by the way of the tokens that they threw in their lawsuit I Believe these are the 12 right here Cardono CHL uh, chz rather Salana Axi Infinity Filecoin Internet Community uh computer I'm reading this too. Fast flow near protocol polygon Voyager token sandbox Dash Anyway, all this is at Ec.com Anyway point is, they're arguing that none of those come with an investment contract. Now the SEC makes the argument that wait a sec.

wait a sec. There is a reasonable expectation of profit from investing in these uh coins or tokens or whatever you want to call them, right? Uh, and and of course that depends on the way they're structured. whether on, you know, on Ethereum and so we don't have to get into all that. Uh, But the point is, uh uh.

the judge gave a really big tell right here. Here's a really big tell: I want you to see this one The judge says. so if you find these are unregistered Securities wouldn't the asset purchasers have the right of recision and then the SEC goes. Yeah, that's correct.

Okay, that would imply that there's an investment contract. The judge trapped the SEC there. The judge literally smacked them upside the face with that one. She walked them into a landmine.

On that question, she's like, hey, you know if these are indeed Securities just what. Like like think about I want you to think about this. Okay, so I'm the judge hey. uh.

SEC So so these are securities, right? You think these are securities? Yeah, Yeah, yeah, we think they're Securities Okay, so in that case, there would be a right of recision. right? Because Securities have a right of recision. Like the right to cancel your investment due to fraud or whatever? right? Yes, Yes, that's correct. Uh, okay.

that's what I thought. And then the judge is processing in her head. But these tokens don't have a right of recision. See the the judge totally walked them into a land mine on that one and they bit that one hookline and sinker.

So that was a big deal. Uh, remember, a recision is a cancellation of the contract again. I even wrote that on eak. This is a big deal.

So the judge walked them into a landmine on that one. Uh, what else do we have? So the SEC argues. Well, it's part of an Enterprise They've argued this over and over again. uh and uh.

And and they basically say, but look, the sec's argument is, come on, it's a token. There are a group of developers and when the developers with their biographies and their skill sets, when they make the Metaverse better, or they make the underlying applications better, when they make the ecosystem better, then when that ecosystem gets better, the value of the token goes up. Okay, that may be true, but does that bestow contract rights? That's the big burn on the SEC. Now, the SEC should have in their summary arguments, which I wrote on Ec.com I wrote the Secc should have made a very, very clear link between a token and the expectation of profit in a project from developers by linking the benefits with the asset they needed to sh show that.

Uh, In fact, I go as far as saying the SEC should make a very clear argument that if you own, you know, 67, uh%, of a token ecosystem. Maybe that gives you some control in a certain token ecosystem, right? Maybe that lets you manipulate it Or or change the voting or or whatever depending on which we're talking about, the SEC punted on that. They did not make that argument. That was probably their best argument.

They didn't even make the their best argument. Okay, no problem. So what happened when the judge was talking to Coinbase? Well, again, they made it very clear that there is no stapled contract to a token that says you have the right to liquidation. You have the right to dividends, You have the right to anything beyond your speculative interest in that token, and the judge frequently said so.

It's kind of like if my friend owns a football jersey and I want to buy that fantasy football team because my friend owns that football jersey am I Investing in a security and the judge is basically rhetorically arguing just because I put money into something with the expectation of making money does not mean it's a security. Because if that were true I wouldn't invest in trading cards I wouldn't invest in Beanie Babies Basically all collectibles would be Securities all Commodities would be Securities And the judge literally says, well, we're getting way too broad here about what a security potential could be. So now, uh, Coinbase then goes, you know, goes on to say look like all we do is provide services. Yeah, we're an exchange.

Yeah, we're a broker dealer and yeah, we provide wallet services. But wallet services are just like an internet browser. Like when you go on Google Chrome and then you go interact with Chase Are we somehow responsible for what you do with Chase Because we helped you get on the internet, you know is Google Chrome responsible for what you do on the internet? No. So so why would Coinbase be responsible for helping you have a way to connect that they're an IT service is what coin bases argument.

That seemed to be a strong argument that somewhat resonated uh with the judge. Uh, Now the other thing that I thought was really interesting is, uh, the judge responds when, uh, so Coinbase says, so you know we thought the SEC would present a scheme of contracts claim. Ah, this is a big one. A A scheme of contract claim suggests that there is an implication that there is a contract.

Even after Coinbase said, hey, Coinbase, we thought you or uh, SEC We even after Coinbase said that, uh, that the SEC might present that argument, the SEC did not pick up that argument. By the way, and what was really interesting is it kind of went like this: Coinbase goes: We thought the SEC would present a scheme of contracts claim Again, the implication that there's an investment contract and the judge goes, you weren't presented that and Coinbase goes exactly. It's almost like the judge was like bantering with them. That came at roughly the same time that Coinbase is like.

we have slides as well. Can we show you our slides and the judge literally says I'd love to see your slides I'm sure somebody stayed up through the night making those slides. She was full serious. She's she's like bro, how much coinbase stock do you own lady like It was so obvious the whole time.

She was totally like handing this case to Coinbase. Now, Coinbase did f up. once they had one really big F up they covered for it, but they had a big F up. Okay, the coinbase F up was simple.

so uh, the judge goes, uh, you know, hey, so um, when when you invest in this contract uh or or rather this token, do you know what happens if Salana let's say goes Belly Up What happens if Salana goes bankrupt and I invested in Salana? uh would I have any rights to sue the developers of Salana and then Coinbase replies and says well, the purchaser of Salana would have a claim in fraud and no, that was the wrong answer because the judge is like wait, but you just said there's no contract so how could there be a fraud claim The judge literally handed them an easy win right there and they totally fumbled on that and then the coinbase guy retracts and he's like oh oh oh, I I'm sorry I mean uh uh no no, it's not fraud, it's Tor uh, that's different. Uh yeah, you're right, there's no contract and they kind of got back on the same page. but it was really interesting. Even through that total disaster, the judge was still trying to like help them along.

So I think the Judge kind of went into today with a decision already made and they were looking for a stronger case from the SEC. Now I did think it was weird that the judge is literally like hey, I've got Senators telling me don't get involved in coinbase like stay out of this and the judge is like so maybe I should just stay in my lane and I'm like wait a second you're literally saying that you're being politically what? okay, whatever. Maybe she's just being transparent. whatever.

But then there was yet another argument. Okay, and this was an interesting one, which was crazy because this is literally what the SEC used in their closing argument: I'm like, bro, why would you use your weakest claim in your closing argument SEC No, like I Again, I'm trying to look at this from a neutral point of view, out of interest for like, how law works and judges and and the judicial J judicial system works. So the weakest argument the SEC had is literally what I'm about to say, which they ended up using. in their summary argument.

The SEC argued that Coinbase is an unregistered exchange and that the SEC has never approved a broker deal ER also operating in exchange. So think about that for a moment. There's the New York Stock Exchange and then there's Robin Hood. They're separate, right? Coinbase is both.

Coinbase is both the New York Stock Exchange and Robin Hood And the Secc is like, you know, there's a conflict of interest between, uh, the broker dealer also being an exchange. We've never approved one of those before. and you know what the judge says, is that against the law And the SEC response, Well, it's not illegal per se. We've just never approved an exchange that was also a broker dealer.

Bro, why would you use that argument in your closing argument? That was your worst argument. I mean whatever like it's it's good for the crypto Community I'm just saying like I was shocked uh by the SEC there. so uh, the SEC also and this was a really damning point which is amazing for the crypto Community but this was a damning one. Okay, the SEC goes so uh or or the judge goes well, you know.

I'm sure everybody buys tokens because they hope they appreciate in value, but that's why people buy trading cards or beanie babies as well. Uh, are there tokens without an ecosystem and the SEC goes yes. Bitcoin The judge says, is that because it's a replacement for Fiat No, there's no ecosystem behind it. if no one is inducing any anything, you can't be buying a security so to speak and the judge says uh, uh, basically that like hey, so is is Bitcoin a a security and the SEC is like well, no, okay, now what? what? What did Coinbase do? Coinbase literally took that admission in this case and at the end says hey, um, you know Bitcoin actually isn't very different from all of these other tokens.

You know there are support groups for Bitcoin just like there are support groups for Cardano what's the difference And so Coinbase went like to the next level here and they're like hey, you know, come to think about how much we're winning this case, um what really is the difference between Bitcoin and all these other coins? You know, after all, the SEC did say Bitcoin isn't a a security So uh, maybe that's the argument. Like oh my gosh, it's just like putting the nails in the coffin. So anyway. I Like that argument might not hold, but it doesn't need to because the weakest.

Well let's put it this way: the strongest case that the SEC could have put forward, which would have been the connection that tokens are like a stock the SEC did not make. Instead, Coinbase had the benefit of making the strongest argument, which is even if you're making an investment with the expectation of making a profit, there is no contract. And the Hoe test, which is what this all relates to, has to do with the fact that there is an expect that there is an investment contract now I will say the judge did say and this was a potential weak point. She said there could be a void in Coinbase's argument.

The void in Coinbase's argument is that wait a minute. Does Howie actually only apply to investment contracts? Because remember and this is something else that could be debated? Okay, this could be debated. Remember, there are four components of the Howe test: an investment of money in a common Enterprise with the expectation of profit to be derived from the benefit of others. Notice that none of those four things say investment contract, but all of those four components came from the Hoe case which defines that a security is any investment contract.

So it's kind of like can you take one part of the Howie case without taking the investment uh contract part That could be debated. So if the judge and and I'll give you my opinion on this, if the judge wanted to side with the SEC, they could say Hoy test doesn't say investment contract. Therefore, SEC wins. That's that's all the That's all the judge would have to do.

The Hoe Test nowhere says anything about their needing to be an investment contract. It's a security. But the problem with this, which is what the judge uh uh, indicat at is, well, wait a minute. What if I invest in Beanie Babies I expect to make money I Expect other people are going to be interested in Beanie Babies Which means I might benefit from the efforts of others.

You know, maybe other people are going to burn BB Beanie Babies There'll be less beanie babies out. Kind of like people burn tokens. There'll be less Beanie Babies outstanding. and then the value of my Beanie Baby will go up right.

And then you could argue. Well, is that a common Enterprise Like, you could make all of these different arguments right. but the judge is really concerned that if she sides with the SEC she encompasses Commodities and beanie babies and trading cards all on the purview of a security. When the reality that the judge seems to point out is Coinbase is a like providing facilitating Services Coinbase is providing IT services.

Coinbase is primarily operating in secondary transactions which have no jurisdiction. With the SEC. they're exempt transaction actions and you can't look at the Howe test with just these four components. You must also consider the investment contract aspect.

And since there is no investment contract in relation to these tokens that people are are trading, then these tokens can't be a security. The reason for that is this idea that well, like who gets the contract, can can a blockchain address be a party to a contract? I'm not talking smart contracts here. I'm talking about legal contract in law. Well, a wallet address isn't a legal entity and it's not a person.

it's an address. You know, It's like a Po. Box. It's like saying my Po.

box has the right to sue somebody. Well, no, it doesn't. So do those tokens which have ownership and random wallet addresses Like who's the individual that actually owns those wallet addresses. Who would get contractual rights? So in other words, you can't really have a contract if you don't know who the other person is.

But by virtue of the blockchain, most of the time you have no freaking idea who the other person is. So if you don't know who the other person is, how could you have a contract with the other person? Which means there can't be an investment contract. And If there can't be an investment contract. then the Howie test can't qualify.

Which means these are not Securities So now I'm going to give my bottom line opinion on this. my bottom line opinion on all of this: I Think with a 90% degree of certainty, Coinbase wins this. I Went into this thinking nearly the opposite: I've been convinced after listening to this for four and a half hours. the SEC did not make a very convincing argument.

The judge seemed married to Coinbase, and quite frankly, the arguments over at Coinbase despite their stumbles, one stumble uh, were strong. I think they made a very, very good point. So that's my opinion. Uh, so uh, you know, don't sue me bro.

I'm literally a dude with a LEGO cup and the skull. uh LEGO cup over here who wants to drink coffee and go to the bathroom because it's been like 5 hours? So if you like this kind of content, make sure to subscribe to the channel. Check out Eac.edu whenever I Get around to dealing with the Beige book. Thank you so much for watching.

Really appreciate yall and we'll all see you in the next one. Goodbye and good luck. Why not advertise these things that you told us here? I Feel like nobody else knows about this? We'll We'll try a little advertising and see how it goes. Congratulations man, you have done so much.

People love you people. look up to you. Kevin PA there financial analyst and YouTuber meet Kevin Always great to get your take even though I'm a licensed financial adviser, real estate broker and becoming a stock broker. This video is neither personalized Financial Advice nor real estate advice for you.

It is not tax, legal or otherwise personalized advice tailored to you you. This video provides generalized perspective, information and commentary. Any third-party content I Show should not be deemed endorsed by me. This video is not and shall never be deemed reasonably sufficient information for the purpose of evaluating a security or investment decision.

Any links or promoted products are either paid affiliations or products or Services which we may benefit from I personally operate and actively managed ETF and hold long positions in various Securities potentially including those mentioned in this video. However, I have no relationship to any issuers other than house Act nor am I presently acting as a market maker.