Coinbase Takes Legal Route to Compel SEC’s Action on Rulemaking Petition

In an unexpected turn of events, Coinbase has brought legal challenges to the SEC.

Coinbase is seeking to compel a response from the U.S. Securities and Exchange Commission (SEC) regarding its rulemaking petition, which has been pending since July. The exchange has filed a narrow action in a federal court to request a “yes or no” response to its petition.

Coinbase Pushes Back

In July 2022, the exchange submitted a petition, calling for clearer regulatory guidelines for the cryptocurrency industry in the U.S.

The document outlined 50 Coinbase’s specific questions to the SEC, encompassing a wide range of topics such as the regulatory treatment of digital assets and the classification of tokens as securities.

According to a blog post by Coinbase’s Chief Legal Officer, Paul Grewal, the Administrative Procedure Act mandates the SEC to respond to the petition “within a reasonable time.” However, the expected respond has been pending over nine months. Now Coinbase is pushing for an answer.

Grewal stated, “It seems like the SEC has already made up its mind to deny our petition. But they haven’t told the public yet. So the action Coinbase filed today simply asks the court to ask the SEC to share its decision.”

He further emphasized the importance of agencies, including the SEC, providing a response once a decision has been made, particularly if the answer is negative.

Loose Regulations

Clarity on these regulatory matters is crucial, as Coinbase and other crypto companies are facing potential enforcement actions from the SEC without a clear understanding of how the agency believes the law applies to their business.

Coinbase is determined to compel a response from the SEC and obtain the necessary clarity for the cryptocurrency industry.The leading crypto exchange has recently found itself entangled in various legal battles with the US government.

Alongside the ongoing investigation by the SEC, Coinbase is also actively funding a lawsuit against the US Department of the Treasury over Tornado Cash sanctions. Tornado Cash is a mixer service that erases the traceability of money on the blockchain.

The regulatory scrutiny on Coinbase heightened in the past year when former Product Manager Ishan Wahi was charged with insider trading by federal prosecutors and the SEC.

Simultaneously, the SEC and Commodity Futures Trading Commission (CFTC) accused Coinbase of listing securities in connection with 9 tokens listed on its platform.

In March, Coinbase received a Wells Notice from the SEC, indicating potential securities violations. The Wells Notice serves as a preliminary indication that the SEC may take legal action against the company, allowing Coinbase time to prepare a rebuttal argument.

While receiving a Wells Notice does not necessarily imply that the company has violated or will be punished by the SEC, it signals the imminent legal battle between the two entities.

The crypto companies have long been the SEC’s targets. Coinbase’s competitor, Kraken, previously faced a lawsuit related to its staking-as-a-service program.

Kraken was ultimately fined $30 million and forced to permanently shut down the program after the regulator found that the company had offered unregistered securities.

SEC Chair Gary Gensler has referred to the Kraken case as a warning for other crypto companies in the US, including Coinbase, that offer similar products.

In response, Coinbase has maintained that its staking product is not in violation of US securities laws, as it does not meet the criteria of the Howey Test, which is used to determine whether an investment qualifies as a security.

In light of the regulatory challenges, Coinbase CEO Brian Armstrong
has publicly expressed his concerns about the lack of clear regulations for the crypto industry in the US. Armstrong even hinted at the possibility of considering relocating the company’s operations outside of the US.

The company has revealed plans to open a derivatives exchange, potentially in Bermuda, as it seeks to navigate the evolving regulatory landscape in the cryptocurrency industry.