US cryptocurrency exchange Coinbase has filed a lawsuit against the Securities and Exchange Commission, accusing the agency of being arbitrary and capricious in refusing to adapt rules to clarify oversight of the industry. This case is a response to the SEC’s rejection of the company’s formal petition for rulemaking, again posing an important question before the courts for the future of crypto regulation.
Coinbase blames SEC on cryptocurrency issue
Coinbase Inc. (COIN) accused the U.S. Securities and Exchange Commission of ignoring the law when rejecting the company’s formal petition on crypto rules, according to a filing filed Monday in the U.S. Court of Appeals for the Third Circuit. Coinbase lawyers argue that the securities regulator has acted arbitrarily and capriciously in asserting jurisdiction over cryptoassets, while also refusing to write new regulations on how these assets should be treated.
The company argued in its opening brief of its lawsuit that the agency instead directed its oversight of digital assets through enforcement actions. When the SEC rejected the Coinbase petition in December, the exchange’s lawyers argue that it didn’t offer much of an explanation for why it wouldn’t write crypto-specific regulations. In a statement when his agency rejected the Coinbase petition, SEC Chairman Gary Gensler argued that the regulator was working on crypto rules even if they were not the rules the industry wanted and that “it is important to preserve the commission’s discretion.”
Legal officer made a statement
Paul Grewal, Coinbase’s chief legal officer, said on Monday at “We will have difficulty.” said. The company’s lawsuit aims to force that answer. The company wrote in its summary:
The SEC is demanding that the industry comply with securities law requirements that are unenforceable, inappropriate, and still evolving, or join the many companies currently facing enforcement actions, including Coinbase. Yet the SEC refuses to provide the rulemaking necessary to set stable standards, to demonstrate how it believes it is possible to comply with these unrelated requirements, and to provide a way to do so.
Regulatory direction in the crypto space
While this week’s latest legal challenge alleges that the regulator has failed to properly regulate crypto, it is not directly linked to Coinbase’s epic court fight with the SEC, which could eventually help steer the course of treatment of crypto exchanges under U.S. securities law. In this case, the SEC accused Coinbase of illegally operating an unregistered exchange that listed unregistered crypto securities.
One common thread in the disputes is the SEC’s reluctance to formally define what constitutes a cryptosecurity outside of the disclosures the agency provides in enforcement actions. This question has not been answered in any of the crypto rulemaking efforts that the SEC presents as evidence that it is already making crypto policy. The agency is working on several key rules that could have dramatic impacts on how the industry does business if they survive potential court challenges.
These rules include the SEC’s proposals to overhaul the definition of exchanges for linking on crypto platforms and require investment advisors to use so-called qualified custodians to park their clients’ crypto, as well as a recently finalized rule to expand the definition of dealers.
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