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Coinbase asserts that the SEC is exercising authority over crypto assets without establishing dedicated regulations for their treatment
In trying to address the regulatory ambiguity surrounding cryptocurrency, Coinbase has taken legal action against the Securities and Exchange Commission (SEC). The crypto exchange accuses the SEC of unlawfully rejecting Coinbase’s request for clear regulations on digital assets. Coinbase states that the agency has been inconsistent by failing to provide specific rules for overseeing the cryptocurrency industry.
Coinbase asserts that the commission is exercising authority over crypto assets without establishing dedicated regulations for their treatment. Instead of creating new rules tailored to the unique characteristics of digital assets, the agency has relied heavily on enforcement actions to regulate the cryptocurrency industry. The exchange’s legal team argues that the SEC’s rejection of their request for rulemaking lacked a sufficient explanation.
Coinbase had requested clearer rules as the exchange saw the SEC’s regulatory requirements as ambiguous. However, the commission rejected in a letter dated December 2023, stating:
“The Commission disagrees with the Petition’s assertion that the application of existing securities statutes and regulations to crypto asset securities, issuers of those securities, and intermediaries in the trading, settlement, and custody of those securities is unworkable.”
However, Coinbase’s legal team aims to compel the SEC to justify its inaction and initiate the process of creating new rules that would establish stable standards for the crypto industry. The exchange insists that the agency should demonstrate how compliance with existing securities laws is possible for crypto entities rather than relying solely on case-by-case enforcement.
In the most recent release, the crypto company, in arguing its stance, said:
“In opting for regulation by enforcement over rulemaking, the SEC has refused to provide the fair notice and regulatory adaptations the industry would need to satisfy the illegitimate demands the agency is making.”
Coinbase’s chief legal officer Paul Grewal revealed on his X page that the company is challenging the commission regarding rulemaking, describing the SEC’s stance as arbitrary and capricious.
Today @coinbase filed our opening brief in the Third Circuit challenging the SEC’s denial of our rulemaking petition. Tl;dr: the SEC’s denial is arbitrary and capricious, an abuse of discretion, and a violation of the Administrative Procedures Act. 1/7 https://t.co/v09uE2OHsb
— paulgrewal.eth (@iampaulgrewal) March 11, 2024
SEC’s Ongoing Legal Battle Against Coinbase’s Crypto Operations
This legal challenge is separate from Coinbase’s ongoing court battle with the SEC, where the agency has accused the exchange of operating unregistered crypto securities services. In June 2023, the SEC charged the crypto company for operating as an unregistered securities exchange broker and clearing agency.
Coinbase argued that the Howey test, a Supreme Court framework, does not apply to cryptocurrencies like those sold on their platform. However, both cases highlight the SEC’s failure to define what constitutes crypto security beyond its enforcement actions, leaving the industry in a state of regulatory uncertainty.
The legal battle between Coinbase and the SEC is just one of the many other legal battles the agency has been having with different crypto exchange companies. The agency has also sometimes charged Binance to court for breaking its regulations and unlawfully facilitating the trading of several crypto tokens that the SEC deemed unregistered securities.
