The U.S. Court of Appeals for the Third Circuit has given the Securities and Exchange Commission (SEC) 120 days to respond to Coinbase‘s (NASDAQ: COIN) rulemaking petition against the securities regulator, which asks that it issue rules tailored to digital assets and regulatory guidance for the industry.
The SEC had earlier told the court that it expects a response ready within 120 days. The court, in response, said that it would retain jurisdiction over the issue but refrain from making a ruling until the 120 day window has elapsed.
The court expects the SEC to respond to the Coinbase request, or provide further information, in the next 120 days, or on October 11, 2023.
This comes after the SEC elected not to reply to an April 24 petition filed by Coinbase, which itself was an attempt by the exchange to get a response to an earlier petition from July 2022—this petition asked the SEC to propose and adopt crypto-specific rules to govern the sector.
Tweeting after the court announcement, Coinbase Chief Legal Officer Paul Grewal claimed the decision was a win for the exchange:
“The Third Circuit just ruled that it will retain jurisdiction over our challenge to the SEC’s inaction on our petition for basic rules for crypto. A further report is due in 120 days. We are grateful that the Court will continue to shine a bright light on an SEC process that until now has operated entirely in darkness.”
It remains to be seen whether the SEC will respond by the October deadline, but the fact that the regulator offered up the window would suggest some confidence that it will have a decision in October. In June, the SEC wrote to the court that it had yet to decide on a course of action regarding the petition, adding that there should be no specific deadline for a response or a requirement to provide periodic reports, per Coinbase’s request.
“There is no merit to Coinbase’s extraordinary request for a writ of mandamus to compel the Commission to act on Coinbase’s wide-ranging rulemaking petition within seven days,” said the SEC. “The Commission has not decided what action to take on that petition in whole or in part—which is entirely reasonable given the breadth of the rulemaking.”
The fact that the Third Circuit has given the SEC 120 days to file a “further report” suggests that the court is expecting the regulator to engage to some extent, but it is unclear how the court would respond if the SEC did not provide the comprehensive rulemaking and guidance that the Coinbase petition requests.
The Coinbase vs SEC story
In March, Coinbase announced it had received a Wells Notice from the SEC warning it to expect imminent legal action for violating federal securities laws.
The SEC believed it has identified securities violations relating to “aspects of the Company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet” products.
Eventually, on June 6, the SEC did sue Coinbase, alleging it had violated several securities laws, including operating as an unregistered exchange.
However, before these charges were officially filed, Coinbase responded to the Wells Notice on April 19 with a lengthy submission to the SEC explaining why it was unjustified and that any action taken by the regulator “will fail as a matter of fact and law.”
A few days later, on April 24, the digital asset exchange filed suit with the U.S. Court of Appeals for the Third Circuit, requesting the court force the SEC to respond to its July 2022 petition, which asked the SEC for regulatory clarity and new rules specific to the unique nature of digital assets.
The SEC argued in its response to the April suit:
“That Coinbase would like its policy preferences addressed immediately does not entitle it to extraordinary relief ordering the Commission to act on a rulemaking petition that has been pending for well under a year.”
Despite this protestation from the regulator, on June 6, 2023, the court ordered the SEC to answer whether it had decided to deny Coinbase’s petition for rulemaking; if not, how much additional time it required to decide whether to grant or deny the petition; and why the court should not retain jurisdiction, order periodic reports as Coinbase proposed, and establish a deadline by which it will rule on the Writ of Mandamus.
In answer, the SEC filed its June 13 letter denouncing Coinbase’s request for a writ of mandamus as “extraordinary,” stating its discretionary rulemaking agenda should not be subject to a specific timeline, and that it had not yet decided whether to respond to the July 2022 rulemaking petition.
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