Coinbase Sues SEC In Bid For Regulatory Clarity

Coinbase, the top US crypto exchange, is taking legal action against the SEC, demanding clear rules for the digital asset sector.

On Monday, Coinbase filed a narrow action in federal court seeking to compel the SEC into replying to the rulemaking petition it put to the SEC last July. The petition asked the SEC to use its formal rulemaking process to establish regulations governing the crypto industry, but Coinbase said the SEC failed to respond to its petition within a reasonable timeframe.

“If the SEC says no to our rulemaking petition…then Coinbase would be allowed to challenge that decision in court,” the company said in a blog post. “It’s important for the SEC…to respond to the petition once the agency has made up its mind, especially if the answer is no — otherwise, the public can never exercise its right to ask a court if the agency’s decision was proper.”

The filing comes as tensions flare between the SEC and Coinbase. Last month, the agency served Coinbase with a Wells Notice, a document that typically precedes a formal lawsuit alleging securities law violations.

Wells Notice

Coinbase said the notice concerned “an unspecified portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet.” Last week, Brian Armstrong, the co-founder and CEO of Coinbase, said the company will gladly go to court over the matter.

On April 21, Armstrong met with members of Congress, urging them to push for regulatory clarity on crypto matters. “The SEC has caused untold harm to America with its policy of regulation by enforcement,” Armstrong tweeted. “We will fight to fix that.”

Coinbase said its petition gained broad support, with more than 1,700 individuals and entities submitting formal comments echoing the exchange’s demands for clear regulatory guidance.

“The U.S. does not currently have a functioning market in digital asset securities due to the lack of a clear and workable regulatory regime,” the petition reads. “New rules facilitating the use of digital asset securities would allow for a more efficient and effective allocation of capital in financial markets and create new opportunities for investors.”

Regulation By Enforcement

Coinbase accuses the SEC of using enforcement actions to establish regulatory precedent, rather than following the “well-established rulemaking process” that allows for public input from a wide range of stakeholders.

In September, critics decried the SEC for burying its claim that the entire Ethereum ecosystem falls under its regulatory jurisdiction, deep in a complaint filed against a 2018 initial coin offering (ICO).

The complaint said the SEC considers transactions executed on the Ethereum network to have taken place in the United States because Ethereum nodes “are clustered more densely in the United States than in any other country.”

Lawmakers are also among critics accusing the SEC of using heavy-handed tactics to regulate crypto through enforcement while failing to provide clear regulatory guidance to the industry during the reign of current SEC chair, Gary Gensler.

In September, U.S. Senator Pat Toomey took aim at Gensler’s SEC for failing to make public the framework it uses to determine whether a cryptocurrency is a security during a Senate Banking Committee hearing.

“Gary Gensler famously argues that virtually all crypto tokens are securities. I think reasonable people can disagree with that,” Toomey said. “Given the novel nature of these tokens, Congress ought to step in to provide clarity. In particular, we need to revisit the definition of ‘security’ as part of a larger effort to tailor a regulatory framework that is calibrated to the unique risks and activities of the crypto market.”

In an April 7 appearance on the Unchained podcast, Tom Emmer, the House Majority Whip, characterized Gensler as a “bad faith regulator” who is “blindly spraying the crypto community with enforcement actions while completely missing the truly bad actors.”

And just last week, Patrick McHenry, chairman of the House Financial Services Committee, slammed Gensler and the SEC for stifling innovation through aggressive enforcement actions. He accused the agency of “driving innovation overseas and endangering American competitiveness.”

On April 18, Armstrong told CNBC that Coinbase might consider relocating away from the United States if regulators fail to provide clarity to the crypto industry.

Commodities or Securities?

The Commodities Futures Trading Commission, the U.S. regulatory agency tasked with overseeing commodities and derivatives markets, also accuses Gensler’s SEC of overstepping its regulatory jurisdiction.

On March 8, CFTC chairperson Rostin Behnam told the Senate Agriculture Committee that Ethereum and stablecoins are commodities, contradicting Gensler’s suggestion that “every [crypto] other than Bitcoin” is subject to existing securities laws.

“I have made the argument that Ether is a commodity,” Behnam said. “It has been listed on CFTC exchanges for quite some time, and for that reason, it creates a very direct jurisdictional hook for us to police.”

Coinbase’s petition also said digital assets “overwhelmingly” exhibit the characteristics of commodities.

‘Stand with Crypto’ NFT

On Monday, Coinbase threw its support behind a commemorative “Stand With Crypto” NFT collection on the Zora marketplace, calling on crypto community members to show their support for “sensible crypto policy” by minting the token. Proceeds raised through the collection will be donated to crypto advocacy groups via Gitcoin.