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Coinbase has filed a new lawsuit against the Securities and Exchange Commission (SEC), demanding that the regulator respond to its proposal to initiate “new rulemaking” for the crypto industry.
In a new lawsuit filed this week, Coinbase is asking a federal appeals court to compel the SEC to respond to a rulemaking petition it originally filed in July 2022.
As per the petition, Coinbase wants the SEC to use its rulemaking process to provide “guidance” for the crypto industry, and has accused the regulator of violating the Administrative Procedure Act (APA) due to its failure to respond.
The APA stipulates that public agencies must respond to legal claims filed against them “within a reasonable time” — a window that Coinbase believes has now closed.
“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 have not told the public yet,” said Paul Grewal, chief legal officer at Coinbase.
In the original petition, Coinbase argued that new rulemaking is necessary to provide “regulatory clarity” to the crypto industry, following “uneven” enforcement action against platforms offering similar products and services.
Coinbase added that, although it does not offer crypto-asset securities, new rule-making would allow the SEC to set the record straight on its interpretation of securities rules when applied to crypto.
“Coinbase, like many other exchanges, has intentionally and conscientiously steered well clear of securities to ensure that we are able to operate in full compliance with applicable laws and regulations,” said Grewal, who penned the 33-page petition.
“Digital assets that trade today overwhelmingly have the characteristics of commodities.”
However, the petition did recognise that “some” crypto-assets are securities and, for these securities to be offered and traded safely, the US needs a “clear and workable regulatory regime”.
As an example, Grewal pointed to the EU, where at the time lawmakers were drafting the Markets in Crypto-Assets (MiCA) regulation — a comprehensive framework that was passed this month.
But despite other jurisdictions taking action to accommodate crypto, Grewal said the SEC has not yet taken “constructive steps”.
“The Commission has yet to constructively engage with digital asset market participants on the design of a workable regulatory framework, let alone propose any new rules governing this activity,” said Grewal.
John Reed Stark, consultant and former head of enforcement at the SEC, said that he believes that Coinbase’s appeal is a stalling tactic designed to buy time before the SEC files charges against it.
This month, he said that he believes Coinbase "is next" in the SEC's cross-hairs as its cracks down on unregistered crypto exchanges.
“Coinbase's SEC lawsuit for regulatory clarity is a desperate deflection and noxious red herring,” said Stark.
“Intended to sidetrack and dissemble the plain truth — that the crypto-emperor has no clothes — the charade is a subterfuge and an attempt to incite the mob under a false pretence.”
SEC gives no quarter to Coinbase
The SEC’s unwillingness to build a new framework for crypto-asset securities remains the same today and has arguably hardened since Coinbase filed the petition.
Last month, the SEC issued a Wells notice to Coinbase, indicating that enforcement action is highly likely.
This was followed, one day later, by the publication of an official SEC Investor Alert on the dangers of trading in crypto-asset securities.
After receiving the Wells notice, Coinbase took the highly unusual step of not only sharing the notice online but responding to it publicly.
This was done firstly through an official statement posted to the Coinbase website and secondly through a 73-page submission to the SEC posted on Thursday (April 27).
“If the Commission pursues this matter,” Coinbase wrote in its submission, “it will face a well-resourced adversary that will necessarily be motivated to exhaust all avenues.”
The public statements appear to be an attempt to curry favour among the crypto community before the SEC takes further action.
Dennis Kehler, president and CEO of investor watchdog Better Markets, said the tactic is an underhand one from Coinbase, since it knows that the SEC cannot respond.
“The SEC cannot publicly comment until the conclusion of any investigation and Wells process and, even then, only if the five-member Commission votes to bring charges,” he said.
“Coinbase’s actions therefore appear designed to ensure that the public and media only gets half the story, and a decidedly biassed half a story at that.”
This week, Coinbase also launched a "Stand With Crypto" non-fungible token (NFT), which crypto enthusiasts are encouraged to download and display to show their support. At the time of writing, over 56,000 of these NFTs had been downloaded.
Don’t de-bank digital asset firms, say US lawmakers
In other news this week, three Republican lawmakers wrote to prudential regulators to decry attempts to “de-bank” the digital asset ecosystem.
Representative (R-NC) Patrick McHenry, chair of the House Financial Services Committee, led a trio of Congressman who signed letters to the heads of the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of Comptroller of the Currency (OCC).
In the letters, they compared the actions of these agencies to similar actions taken in 2012, under President Barack Obama, when prudential regulators pressured banks into cutting ties with “high-risk” clients such as gun dealers, pawn shops and payday lenders.
“Digital asset activity is not inherently risky,” they wrote. “For example, the collapse of FTX was not caused by the riskiness of digital assets and related activities, but by run-of-the-mill fraud.”
The Congressmen also claimed that the collapses of Silicon Valley Bank (SVB) and Signature Bank were not caused by crypto customers, despite these banks’ exposures to the crypto sector.
“The reaction by the federal prudential regulators to fraud and mismanagement should not lead to de-risking of the digital asset industry,” they said.
“Taken together, the actions of the Fed, FDIC, and OCC do not appear to be in reaction to recent events or the result of a sudden desire to protect financial institutions from risky behaviour, but instead suggest a coordinated strategy to de-bank the digital asset ecosystem in the US.”
In closing, the Congressmen asked the three agencies to provide records of all communications between their employees related to their "Joint Statement on Crypto-Asset Risks to Banking Organizations", published in January this year.
They also asked the three agencies to hand over records of all communications between themselves and regulated institutions related to the joint statement and other articles pertaining to banking risk among crypto firms.
