How Coinbase is Fighting the SEC Over Crypto Rules
The crypto industry is facing regulatory uncertainty in the US, as the Securities and Exchange Commission (SEC) and the leading crypto exchange Coinbase Global (COIN.O) are locked in a legal battle over the rules governing the digital asset sector.
Coinbase, which has over 73 million verified users and $223 billion in assets on its platform, has been pushing for the SEC to create a new set of rules for the crypto sector, arguing that the existing securities laws are outdated and unclear. The SEC, on the other hand, has maintained that most crypto tokens are securities and subject to its jurisdiction, and has sued several crypto companies, including Coinbase, for violating the securities laws.
The dispute escalated on Friday, December 15, 2023, when the SEC denied Coinbase’s petition for new crypto rules, which the crypto exchange then sought to challenge in court. This article will explain the background and the details of the dispute, and its implications for the crypto industry.
The SEC’s Denial of Coinbase’s Petition
Coinbase filed a petition with the SEC in 2022, requesting the agency to propose new rules for the crypto sector, by the Administrative Procedure Act (APA), which allows interested parties to petition federal agencies for rulemaking. Coinbase claimed that the current securities laws are inadequate and unworkable for the crypto sphere and that the SEC has failed to provide clear and consistent guidance on how to comply with them.
Coinbase also argued that the SEC’s enforcement actions against crypto companies are arbitrary and inconsistent and that the agency has created a “regulation by litigation” environment that stifles innovation and harms consumers. Coinbase cited several examples of the SEC’s actions, such as:
- The SEC’s lawsuit against Coinbase in September 2022, for offering a lending product called Coinbase Lend, which the SEC alleged was an unregistered security offering. Coinbase said it had voluntarily delayed the launch of the product and tried to engage with the SEC, but the agency refused to explain its reasoning and threatened to sue without providing any notice or process.
- The SEC’s lawsuit against Ripple Labs in December 2020, for selling XRP, the third-largest cryptocurrency by market capitalization, which the SEC alleged was an unregistered security offering. Coinbase said it had listed XRP on its platform since 2018, after conducting a legal analysis and consulting with outside counsel, and that the SEC had never indicated that XRP was a security until the lawsuit.
- The SEC’s lack of clarity on whether Ethereum, the second-largest cryptocurrency by market capitalization, is a security or not. Coinbase said it had listed Ethereum on its platform since 2016, after the SEC’s former director of corporate finance, William Hinman, stated in a speech in 2018 that Ethereum was not a security. However, the SEC’s current chair, Gary Gensler, has recently suggested that Ethereum may be a security and that the SEC’s views may change over time.
Coinbase asked the SEC to propose new rules that would address the following issues:
- The definition and classification of crypto tokens, and the criteria for determining whether they are securities or not.
- The registration and disclosure requirements for crypto tokens that are securities, and the exemptions and exceptions that may apply.
- The trading and custody rules for crypto tokens that are securities, and the standards and best practices for crypto exchanges and custodians.
- The investor protection and anti-fraud rules for the crypto sector, and the enforcement mechanisms and remedies for violations.
Coinbase said that creating new rules for the crypto sector would benefit the SEC, the crypto industry, and the public, by providing legal certainty, fostering innovation, and protecting consumers.
The SEC, however, rejected Coinbase’s petition, in a 3-2 vote, on Friday, December 15, 2023. The SEC said it would not propose new rules for the crypto sector, because it fundamentally disagreed with Coinbase’s premise that the existing securities laws are unworkable for the crypto sphere. The SEC said that the current laws and regulations are flexible and adaptable and that they apply to the crypto securities markets, as they do to any other securities markets.
The SEC also said that Coinbase’s petition was based on a misunderstanding of the SEC’s authority and role and that the agency does not have the power or the obligation to create a bespoke regulatory regime for the crypto sector. The SEC said that its mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation and that it does so by enforcing the securities laws enacted by Congress.
The SEC’s chair, Gary Gensler, issued a separate statement supporting the decision and said that the SEC welcomes innovation, but not at the expense of investor protection. He also said that in asking the SEC to write rules, Coinbase had acknowledged the SEC’s authority over the crypto sector, something the crypto exchange had denied in the past.
Coinbase’s Response and Legal Action
Coinbase was quick to respond to the SEC’s decision and expressed its disappointment and disagreement. Coinbase’s chief legal officer, Paul Grewal, said in a statement that the SEC’s decision was “arbitrary and capricious” and an “abuse of discretion”. He also said that the SEC’s decision showed that the agency was not interested in working with the crypto industry to create a clear and fair regulatory framework, but rather in imposing its will through litigation and intimidation.
Grewal said that Coinbase had filed a petition for a review of the SEC’s decision in the U.S. Court of Appeals for the Third Circuit, in Philadelphia, shortly after the SEC’s announcement. He also said that Coinbase had shared its court filing on social media platform X, to inform the public and the crypto community of its legal action.
Coinbase’s court filing challenged the SEC’s decision on several grounds, such as:
- The SEC’s decision violated the APA, which requires the agency to respond to petitions for rulemaking within a reasonable time and to provide a reasoned explanation for its decision.
- The SEC’s decision was contrary to the evidence and the law and ignored the facts and arguments presented by Coinbase in its petition.
- The SEC’s decision was inconsistent with its statements and actions, and with the views of other federal agencies and courts, regarding the regulation of the crypto sector.
- The SEC’s decision was harmful to the public interest, and to the innovation and growth of the crypto sector.
Coinbase asked the court to vacate the SEC’s decision and to order the agency to propose new rules for the crypto sector, or to explain why it cannot or will not do so.
The Implications of the Dispute for the Crypto Industry
The dispute between the SEC and Coinbase is not only a legal matter, but also a political and ideological one. It reflects the different visions and values of the two parties, regarding the nature and the future of the crypto sector.
The SEC represents the traditional and conservative approach to regulation, which seeks to preserve the status quo and to apply the existing laws and rules to new and emerging technologies. The SEC views the crypto sector as a potential source of fraud and manipulation and as a threat to the stability and integrity of the financial system. The SEC wants to protect investors from the risks and uncertainties of the crypto sector and to ensure that the crypto companies comply with the securities laws and regulations.
Coinbase represents the innovative and progressive approach to regulation, which seeks to challenge the status quo and to create new and better laws and rules for new and emerging technologies. Coinbase views the crypto sector as a source of innovation and opportunity and as a catalyst for the transformation and improvement of the financial system. Coinbase wants to empower consumers with the benefits and choices of the crypto sector and to work with the regulators to create a clear and fair regulatory framework.
The outcome of the dispute will have significant implications for the crypto industry, and for the millions of users and investors who participate in it. If the SEC prevails, the crypto sector may face more legal challenges and uncertainties and may have to adapt to the existing securities laws and regulations, which may limit its growth and innovation potential. If Coinbase prevails, the crypto sector may gain more legal clarity and certainty and may have a chance to shape the new securities laws and regulations, which may foster its growth and innovation potential.
Frequently Asked Questions (FAQs)
Q: What are crypto rules and why are they important?
A: Crypto rules are the laws and regulations that govern the crypto sector, such as the creation, distribution, trading, and custody of crypto tokens. They are important because they affect the legal status, rights, and obligations of the crypto companies and the crypto users.
Q: What is the SEC and what is its role in the crypto sector?
A: The SEC is the U.S. Securities and Exchange Commission, the federal agency that oversees the securities markets and enforces the securities laws. Its role in the crypto sector is to regulate the crypto tokens that are considered securities and to protect the investors from fraud and manipulation.
Q: What is Coinbase and what is its position on the crypto rules?
A: Coinbase is the largest crypto exchange in the U.S., with over 73 million verified users and $223 billion in assets on its platform. Its position on the crypto rules is that the existing securities laws are outdated and unclear and that the SEC should create a new set of rules for the crypto sector, in collaboration with the crypto industry.
Q: What is the petition that Coinbase filed with the SEC and what did it ask for?
A: The petition that Coinbase filed with the SEC in 2022 was a request for the agency to propose new rules for the crypto sector, in accordance with the Administrative Procedure Act, which allows interested parties to petition federal agencies for rulemaking. It asked for the SEC to address the issues of the definition, classification, registration, disclosure, trading, custody, investor protection, and enforcement of the crypto tokens.
Q: What was the SEC’s response to Coinbase’s petition and what was its rationale?
A: The SEC’s response to Coinbase’s petition was to deny it, in a 3-2 vote, on Friday, December 15, 2023. Its rationale was that the existing securities laws and regulations are flexible and adaptable, and that they apply to the crypto securities markets, as they do to any other securities markets. It also said that it does not have the power or the obligation to create a bespoke regulatory regime for the crypto sector and that its mission is to enforce the securities laws enacted by Congress.
Q: What was Coinbase’s reaction to the SEC’s decision and what did it do next?
A: Coinbase’s reaction to the SEC’s decision was to express its disappointment and disagreement, and to challenge the SEC’s decision in court. It said that the SEC’s decision was arbitrary and capricious, and an abuse of discretion. It also said that the SEC’s decision showed that the agency was not interested in working with the crypto industry to create a clear and fair regulatory framework, but rather in imposing its will through litigation and intimidation. It filed a petition for review of the SEC’s decision in the U.S. Court of Appeals for the Third Circuit, in Philadelphia, shortly after the SEC’s announcement.
Q: What are the implications of the dispute between the SEC and Coinbase for the crypto industry and the future of finance?
A: The implications of the dispute between the SEC and Coinbase for the crypto industry and the future of finance are significant and far-reaching. The dispute reflects the different visions and values of the two parties, regarding the nature and the future of the crypto sector. The outcome of the dispute will affect the legal certainty, the innovation potential, and the consumer choice of the crypto sector, and will shape the transformation and improvement of the financial system.
Conclusion
The crypto industry is at a crossroads, as the SEC and Coinbase are engaged in a legal battle over the rules governing the digital asset sector. The SEC has denied Coinbase’s petition for new crypto rules, and Coinbase has challenged the SEC’s decision in court. The dispute reflects the different perspectives and preferences of the two parties, regarding the regulation of the crypto sector. The dispute will have a lasting impact on the crypto industry and on the future of finance.
Disclaimer:
The information and opinions expressed in this article are for informational and educational purposes only, and do not constitute financial, legal, or investment advice. CryptoWini is not affiliated with Coinbase, the SEC, or any other entity mentioned in this article. CryptoWini does not endorse or recommend any products or services mentioned in this article. CryptoWini is not responsible for any losses or damages that may result from the use of the information in this article. Readers should do their own research and due diligence before making any decisions related to the crypto sector.
