The ongoing battle between Coinbase and the US Securities and Exchange Commission (SEC) has entered a new phase, as the exchange giant continues their push for clearer rules in the US crypto-asset space. The case, which stems from Coinbase’s call for the SEC to establish specific regulations for crypto-assets, is now before the US Court of Appeals for the Third Circuit.
Coinbase had previously petitioned the SEC to create a tailored regulatory framework for the industry. When that petition was denied, the company took legal action, claiming that the SEC’s refusal to engage in rulemaking was both arbitrary and harmful to innovation.
Coinbase's legal team told the US Appeals Court on Monday that the SEC had failed to provide a pathway for businesses and industry participants to progress in the crypto-asset space. In a series of posts on X, Coinbase's Chief Legal Officer, Paul Grewal, expressed frustration, stating that the SEC "refuses to provide a reasonable explanation for its barebones denial" while simultaneously carrying out what the company describes as an aggressive and unclear enforcement strategy.
The SEC’s position, however, is that what it views as dissatisfaction with existing regulations does not give Coinbase or other crypto companies 'special treatment' under the law. The SEC argues that it is not obligated to create new rules specifically for the cryptocurrency industry and the existing laws are sufficient. The myriad of lawsuits debating the definitions and scope of existing laws and number of jurisdictions making specialised regulation for crypto will inform readers views on this latter point.
The central question in this legal standoff is whether crypto-tokens - like those traded on Coinbase’s platform - should be classified in the US as securities (i.e., whether they meet the so-called "Howey" test). SEC Chair Gary Gensler has repeatedly stated that the majority of cryptocurrencies fall under this category (despite recently withdrawing the use of the phrase "crypto-asset securities" which the SEC has used for several years), and has called on exchanges like Coinbase to "come in and register" under existing securities laws. Coinbase, however, argues that there is no way for it to register and the current legal framework is unworkable, in short there is no way for exchanges to comply with the current law in the US. This sentiment is shared by many businesses operating within the sector who point to example of firms who have sought registration either being denied or met with lawsuits.
This legal skirmish is not the only one between the SEC and Coinbase. In a separate case, the SEC sued Coinbase in June 2023, accusing the company of operating as an unregistered broker, exchange, and clearing agency. The regulator also claims that 13 cryptocurrencies available on Coinbase, including SOL, ADA, and MATIC, were securities under US law. That lawsuit is currently in the discovery phase.
For the crypto-asset industry, the outcome of Coinbase's legal efforts could be significant. Coinbase and many others in the sector argue that existing regulations, which were crafted decades ago for traditional financial instruments, are ill-suited to digital assets. Without a clear framework, they warn that innovation will be stifled, and the US will lose its competitive edge in emerging technologies.
At the heart of this debate is a critical question for regulators, lawmakers, and industry participants alike: how should crypto-assets be classified, and what rules should apply to their issuance and trade? If regulators decide these assets should be dealt with under existing laws, it is clear that adjustments, exemptions and rule-making will be needed. If new laws are to be crafted, like the MiCA approach in the EU, then tailoring these laws to this innovative new area is challenging.
As the case between Coinbase and the SEC moves forward, the approach of regulators will shape the future of cryptocurrency and blockchain in the US - and determine whether the country embraces blockchain technology or whether developers seek more friendly emerging regulatory regime in Asia and Europe.
A number of legislative proposals are under debate in the United States congress, but with the legislative process slow, the battle to define the regulatory perimeter is increasingly playing out in the US courts.
Written by Luke Higgins, Steven Pettigrove and Michael Bacina