Five hours in court, and the fate of Coinbase as a going concern hangs in the balance. On Wednesday, Coinbase and the U.S. Securities and Exchange Commission (SEC) sounded off in the Southern District of New York, arguing over whether the top securities watchdog’s lawsuit against the largest U.S. crypto exchange is valid.

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To the surprise of many, U.S. District Judge Katherine Polk Failla came prepared and seemed unusually open to hearing Coinbase out. It’s just one more data point showing that, even if Congress is unable to pass meaningful legislation, and executive agencies continue to “regulate by enforcement,” crypto can at least get a fair trial.

Coinbase is pushing to dismiss the case — and while no formal decision has been made, Failla did reportedly express concern that the SEC is misinterpreting U.S. securities laws and overstepping its bounds. The SEC’s case calls Coinbase’s business model into question.

If the agency wins, it could force Coinbase to delist tokens it deems to be securities (13 tokens were named in the complaint, but SEC Chair Gary Gensler said most cryptocurrencies resemble securities) and/or shut down certain corporate operations. Investment bank Mizuho described this as turning altcoins into “haltcoins.”

But just as the SEC is calling out a core aspect of Coinbase’s business, Judge Failla poked holes in one of the SEC’s central claims. Namely, Failla questioned the idea that when someone buys a token, they are buying into a “common enterprise” and “expect profits” based on the work of developers, which is the definition of security under the prevailing “Howey Test.”

If that were the case, it’d open up the possibility of treating collectables like Beanie Babies as securities, Coinbase lawyer William Savitt noted, in an echo of Judge Failla’s broader concerns about over-regulating commodities. Savitt added that, unlike stocks or bonds, crypto tokens don’t necessarily grant holders rights over a network.

“Investment contracts have to have contracts,” he said, describing the types of legal “enforcement mechanisms” that need to exist, at a minimum, to make a security a security.

Depending on where Failla comes down on this point will determine whether the case goes into the discovery phase. There’s indications that this particular judge is more than sympathetic to Coinbase’s argument, at times saying the SEC set too “few limitations” for itself in regulating crypto and has “too broad” an interpretation of the law.

Further, in a memo she wrote when dismissing a lawsuit against Uniswap founder Hayden Adams, Failla distinguished between decentralized apps, protocols and tokens, in an “indication of how careful she will be here,” Chief Legal Officer at the DeFi Education Fund Amanda Tuminelli said.

While it’s easy to mock the idea that anything that could conceivably increase in value could be regulated as a security by the SEC (under its own interpretation), it’s not like the agency doesn’t have arguments. SEC lawyer Patrick Costello noted that when people buy tokens, “they are investing into the network behind it.”

That’s certainly true — putting aside the notion that some tokens have utility — given how most people treat investing in crypto. Costello was also right to say you can’t “separate” a token from its network, in a blow to people who want to split hairs between “securities” and “investment contracts.” Sometimes a cigar is a cigar.

In fact, legal expert and conceptual artist Brian Frye has long argued that most markets — from fine art to wine, and yes, including crypto — likely fit under the agency’s aegis, even if it hasn’t yet decided to regulate them. Frye, although something of a securities law troll, actually sees SEC regulation as favorable, in part because it usually has a light touch.

More importantly, it would help clear up exactly what tokens are and maybe clear the way for people to start using them. The alternative here is that regulators create a complete and total taxonomic system for every type of token and their different uses, which seems like a longshot (at least without messing something else up).

In the end, this is a conceptual battle with room for nuance. As Judge Torres found in SEC’s lawsuit against Ripple, sometimes a token is a security and sometimes it’s not, depending on the circumstance. Personally, I’d be disappointed if Coinbase won at this stage, because it wouldn’t fundamentally answer the question of whether the SEC has the broad ability to step into areas that look like securities.

We can all laugh about the SEC regulating stuffed animals, or shudder at Failla’s “Beanie Baby class action” thought-experiment. But what if Beanie Babies did become a meaningful part of the global economy, and people really were investing their retirement accounts on the chance “Patti the Platypus” was going “up only.” What exactly would be the difference between “being” and “resembling” a security?

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Daniel Kuhn

Daniel Kuhn was a deputy managing editor for Consensus Magazine, where he helped produce monthly editorial packages and the opinion section. He also wrote a daily news rundown and a twice-weekly column for The Node newsletter. He first appeared in print in Financial Planning, a trade publication magazine. Before journalism, he studied philosophy as an undergrad, English literature in graduate school and business and economic reporting at an NYU professional program. You can connect with him on Twitter and Telegram @danielgkuhn or find him on Urbit as ~dorrys-lonreb.