Coinbase sues SEC to get clarity on digital asset regulations

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The U.S. digital asset giant Coinbase (NASDAQ: COIN) is taking the U.S. Securities and Exchange Commission (SEC) to court in order to force the financial markets regulator to respond to a petition filed by the company last July, asking the SEC for regulatory clarity and rules specific to the unique nature of digital assets.

The 2022 petition didn’t receive a specific public response from the SEC, which has since continued to diligently pursue enforcement actions against individuals and entities in the digital industry, not least against Coinbase, which was the subject of a Wells notice from the SEC in March—a notice informing the company that an enforcement action should be expected soon.

Monday’s 31-page suit, filed with the the U.S. Court of Appeals for the Third Circuit, claimed the securities regulator had “defaulted on its duty to act on Coinbase’s petition even while attempting to enforce its unlawful position,” and asked the court to issue a “writ of mandamus” instructing the SEC to respond to Coinbase’s July rulemaking petition within seven days. A writ of mandamus is an order from a court to a government official or entity requiring it to properly fulfill its official duties or correct an abuse of discretion.

Coinbase is a publicly traded company on the Nasdaq stock market and the largest digital asset platform in the U.S., with a market capitalization of $12.67 billion (as of April 25). Its cryptocurrency exchange is second only to Binance globally—based on traffic, liquidity, trading volumes, and trust in the legitimacy those volumes—however unlike the global Binance platform, Coinbase is actually registered in the United States.

Being registered comes with the advantages of increased trust, legitimacy and regulatory oversight, however the downside has been confusion and disagreement over the nature of some of the assets being traded on Coinbase’s platform.

In its July letter, Coinbase requested that the SEC clear up some of this confusion, asking the agency to “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities.”

Coinbase argued that digital asset specific rules would be appropriate because they represent a paradigm shift from existing market practices, “rendering many of the Commission rules that govern the offer, sale, trading, custody, and clearing of traditional assets both incomplete and unsuitable for securities in this market.”

However, the SEC did not respond to the petition or any of its arguments, leading Coinbase to file the civil suit on April 24 to get answers.

When announcing the suit on Twitter, the company’s Chief Legal Officer Paul Grewal said he had filed a narrow action in the U.S. Circuit Court to “compel the SEC to respond yes or no” to last July’s rulemaking petition.

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

In the crosshairs

Coinbase has been on the SEC’s radar for some time, and after civil and criminal charges were filed last July against a former Coinbase staffer caught trading on advance knowledge of which new tokens would be listed on the exchange, enforcement action against the platform has seemed a case of when, not if.

The SEC said at the time of the insider trading case that “at least nine” of the tokens involved in the scandal were unregistered securities, naturally alerting Coinbase to the likelihood of impending action, which looked to be confirmed with the March 2023 Wells Notice.

However, the SEC itself has been increasingly under the microscope, something Grewal was keen to point out on Monday, stating, “it’s obvious that there’s a lack of clarity among our regulators regarding crypto, as even the chair of the SEC has declined to say which crypto assets are securities.”

He also posted a link to the grilling SEC head Gary Gensler received at an April 18 hearing by the House of Representatives’ Committee on Financial Services, where Committee chair Patrick McHenry (R-NC) claimed Gensler had “refused to provide clarity” on digital asset regulation, as well as taking issue with his “overly aggressive and very expensive rulemaking agenda.”

Despite its vocal and high profile detractors, there are those that believe the agency is on the right track when it comes to enforcement and the classification of most digital currencies as securities. But with pressure coming from major players in the industry and lawmakers on the Hill, it looks as if Gensler and the SEC have some increasingly choppy waters to navigate when it comes to digital asset regulation.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.