Coinbase Sues SEC to Seek Regulatory Clarity on Crypto

The US cryptocurrency company and exchange giant, Coinbase, has sued SEC to seek regulatory clarity for the crypto industry after the securities regulator failed to respond to an early rulemaking petition.

In a oficial blog post on Monday, April 24^th, Coinbase announced that it had filed a narrow action lawsuit in the United States Courts of Appeals for the Third Circuit, urging the judge to force the regulator to respond to a previous petition on whether existing securities rulemaking processes could be extended to the crypto industry.

Today, we filed a narrow action in the U.S. Circuit Court to compel the SEC to respond “yes or no” to a rulemaking petition we filed with them last July asking them to provide regulatory guidance for the crypto industry. 1/4 https://t.co/rlsS1DIFfl

— paulgrewal.eth (@iampaulgrewal) April 25, 2023

Regulatory War Rages on

Following the collapse of the FTX exchange in November 2022, everything crypto-related is beeping red on the Securities and Exchange Commission (SEC) and other US regulators’ radar. Many in the crypto industry have complained that they have requested the SEC to provide the much-needed clarity, but the regulator never entertained them.

Coinbase filed a rulemaking petition with the SEC in July 2022 that seeks regulatory clarity around how existing securities laws might apply to digital assets and requests the commission draft and approve a rule specific to digital assets. However, the agency did not offer a specific public response to Coinbase’s petition. Instead of guidance, it has ramped up enforcement actions against the industry.

Coinbase received a Wells notice from the most-feared regulator just a few weeks ago, threatening legal action over the Exchange’s staking product Coinbase Earn, listed digital assets, and wallets for possible violations of securities laws.

Coinbase’s narrow action lawsuit might be a preemptive action that argues the SEC’s approach to digital assets is unclear and requires formal rulemaking to provide necessary guidance for the industry.

According to Coinbase, the recent legal action, pursuant to the Administrative Procedure Act (APA), asks the SEC to respond to Coinbase’s rulemaking petition “within a reasonable time” with yes or no. However, according to Exchange’s chief legal officer Paul Grewal:

“From the SEC’s public statements and enforcement activity in the crypto industry, it seems like the SEC has already made up its mind to deny our petition. But they haven’t told the public yet. So the action Coinbase filed today simply asks the court to ask the SEC to share its decision.”

Paul said the action might feel unnecessary and unusual, but “it is also unusual for an agency to bring enforcement actions based on a view of the law that it has not yet shared formally with the public.”

Suppose the SEC says no to the rulemaking petition and declines to engage in drafting a rule specific to digital assets. In that case, Coinbase can file another lawsuit “to challenge that decision in court and explain in that formal setting why rulemaking is required.”

Nevertheless, the SEC seems firm in its stance that most cryptos are securities. In a recent House Appropriations Subcommittee on Financial Services and General Government hearing, Gary Gensler said that existing regulations are enough to address the crypto market as most cryptos are securities and fall under SEC jurisdiction.