Coinbase Files A Lawsuit Against The SEC To Compel The Regulator ‘To Provide Overdue Guidance For The Crypto Industry’ Explained

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It Is Unclear How The Legal Strategy Will Unfold For The Firm, Which Has Built Its Business Model Around Compliance

In July 2022, Coinbase filed a rulemaking petition with the SEC, ‘requesting that the Commission propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities.’ Coinbase’s petition asserted that ‘the US does not currently have a functioning market in digital asset securities due to the lack of a clear and workable regulatory regime.’

Coinbase’s lawsuit aims to compel the regulator to respond ‘yes or no’ to the petition. Coinbase argues that the law requires the SEC to respond ‘within a reasonable time’ to the exchange’s petition. If the SEC ‘says no to our rulemaking petition,’ then Coinbase will be able to challenge that decision and explain ‘that formal setting why rulemaking is required.’ Coinbase’s CEO Brian Armstrong has openly criticized the SEC. For example, last year the CEO accused the SEC of ‘sketchy behavior’ and ‘intimidation tactics.’

Coinbase’s announcement of the lawsuit, explains that ‘[f]rom the SEC’s public statements and enforcement activity in the crypto industry, it seems like the SEC has already made up its mind to deny our petition.’ Coinbase was given a Wells notice from the SEC in March ‘regarding an undefined portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet after a cursory investigation.’ At the time Coinbase indicated it is willing to take any SEC charges to court. The SEC has recently brought charges against a Seattle-based Bittrex over offering unregistered securities and Kraken over its staking offering.

SEC Chairman Gary Gensler has also made numerous statements expressing jurisdiction over digital assets. For instance, last month Gensler said all proof-of-stake tokens are securities. Gensler has repeated on numerous occasions that the vast majority of cryptocurrencies are unregistered securities, and during recent testimony before Congress refused to say whether he believed ETH was a security or commodity.

Takeaway: Gensler’s SEC has taken a broad view of its mandate in crypto. The Chairman has asserted that existing laws are applicable to the crypto space and that the clarity sought by Coinbase is not required. Having said that, the SEC could adjust its approach to crypto in the future for a number of reasons, including the election of a new US President. In this context, it's not clear if confronting the SEC will pay off for Coinbase.