Earlier this week, Coinbase initiated legal action against the US Securities and Exchange Commission (SEC) over its failure to respond to a Rulemaking Petition filed last year seeking a clear regulatory framework for digital securities in the United States.
The petition, filed by Coinbase in July 2022, noted that the United States ‘has not yet taken constructive steps’ towards establishing regulation that ‘meets the specific needs of the crypto market’. While drawing a contrast between digital assets which trade as commodities and digital securities, the Petition noted there is no functioning market in digital asset securities in the United States due to the lack of a clear and workable regulatory regime.
The Petition implored the Commission to:
Solicit broader input from the public to address all relevant questions and challenges related to the regulation of digital asset securities with the goal of informing an important rulemaking on this subject.
Coinbase's legal action this week follows months of silence from the SEC in response to the Petition. In respect of the SEC’s inaction, Coinbase’s Chief Legal Officer Paul Grewel stated:
We're absolutely convinced the SEC is violating the law, we feel like we have no choice but to take them to court.
Coinbase filed proceedings under the Administrative Procedure Act seeking a Court order requiring the SEC to respond to Coinbase's petition within 7 days. The filing read:
It is widely recognized...that existing SEC registration and disclosure requirements are incompatible with digital assets…The SEC at a minimum must set forth how those inapt and inapposite requirements are to be adapted to digital assets. But the SEC has refused to do even that.
Although countless calls have been made by industry participants for clearer rulemaking by the SEC relating to cryptocurrencies, the SEC’s chair, Gary Gensler has maintained the position that existing laws are sufficient. Gensler emphasized this again during a hearing before the House Financial Services Committee last week:
We have a clear regulatory framework built up over 90 years.
Earlier this year, the SEC issued a Wells Notice to Coinbase indicating that it may take action against the firm for allegedly listing and offering of unregistered securities. Coinbase has published its response to the allegations this week.
While the scope of Coinbase's current action is limited and Coinbase cannot force the SEC to exercise its rulemaking authority, were the SEC to respond to Coinbase's petition refusing to exercise that authority, Coinbase could challenge that decision in court and plead its case for formal rulemaking by the SEC. With growing pressures on the SEC to provide regulatory clarity, including from Congress, it remains to be seen how the SEC will respond to Coinbase's legal action.