Coinbase takes legal action against SEC in push for crypto regulation clarity

Coinbase announced on Monday the filing of its opening brief with the US Court of Appeals for the Third Circuit, an appeal that challenges the US Securities Exchange and Commission (SEC) over its refusal to provide clear guidelines for the crypto industry, as revealed by Coinbase’s chief legal officer, Paul Grewal, in a post on X.

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

In a brief dated March 11, 2024, Coinbase points out that the SEC indicated it had limited or unclear statutory authority over digital assets for years. However, after a sudden policy reversal, where the SEC started treating most digital assets as securities, it began regulating the industry through enforcement rather than clear rulemaking.

According to Coinbase, the SEC’s approach has unfairly placed companies in a difficult position, as they are now expected to comply with rules that are neither clear nor directly applicable. The firm argues that if the SEC believes it has authority over digital assets, it must formalize this stance through rulemaking.

Coinbase also criticized the SEC for ignoring its rulemaking petition for 20 months and then dismissing it with minimal explanation, despite significant industry input. In December 2023, the SEC rejected a petition from Coinbase, asking for clarification on crypto governance regulations. The agency did not provide a satisfactory reason for the decision to reject. Coinbase argues that the refusal demonstrates the SEC’s arbitrary and oppressive enforcement campaign.

“It is arbitrary on its face, and it goes to the heart of the opaque, oppressive nature of the SEC’s enforcement campaign as a whole,” Coinbase stressed.

“The SEC demands that the industry comply with inapplicable, inapt, and still-evolving securities-law requirements or else join the many companies now facing enforcement actions—including Coinbase. Yet the SEC refuses to conduct the rulemaking needed to set stable standards, to show how it believes compliance with those irrelevant requirements is even possible, and to provide a path to do so,” Coinbase added.

The latest legal move is not directly connected to the ongoing lawsuit between Coinbase and the SEC. The SEC filed a lawsuit against the crypto exchange Coinbase in June last year, alleging it violated US securities laws. The case’s outcome is expected to clarify the classification of certain crypto assets, which the SEC argues are securities and thus must fall under its jurisdiction.

Different rulings in previous legal battles between the SEC and other crypto firms, such as Ripple Labs and Terraform Labs, further complicate the issue.

The SEC sued Ripple Labs, the company behind XRP, alleging that the sale of XRP to institutions was an unregistered securities offering. In July last year, the court ruled that Ripple’s direct sale was a security, but secondary trading on exchanges wasn’t.

The SEC also sued Terraform Labs for offering four tokens as unregistered securities. However, the court sided with the SEC in this case.

Moreover, these cases focus on the initial issuance, while the Coinbase-SEC case focuses on whether the trading of the tokens on these major exchanges constitutes selling securities.