SEC Vs. Coinbase, What’s New?

Lately, there was a lot going on between SEC and Coinbase. At the end of March Coinbase got a Wells notice from SEC warning that the regulator might sue the company, alleging that it had violated securities laws. At the end of April Coinbase publicly responded to the Wells notice and tried to legally force the regulator to respond to a petition for rulemaking that the exchange filed last summer aiming to get proper regulation rules for digital assets.

In early May SEC was ordered by a U.S. court to provide a legal basis for why it has not responded to the petition. SEC must file its response within 10 days (starting from May 3). Coinbase may then respond seven days thereafter.

The Third Circuit just issued a text-only order directing the SEC to file a response to our mandamus petition within 10 days (and gave us 7 days for a reply). Here’s the text of the order:

TEXT ONLY ORDER (Clerk) At the direction of the Court, Respondent is ordered to file an…
— paulgrewal.eth (@iampaulgrewal) May 3, 2023

Apart from legal actions, Coinbase makes great “work with the public”. Earlier it launched Crypto435 to grow the crypto advocacy community, and according to the exchange’s Twitter over 40,000+ people have already signed up for it. Now Coinbase suggests signing an open letter to urge Congress to support pro-crypto legislation that “will create regulatory certainty for crypto.” At the moment of writing, the letter had almost 74,000 votes.

Meanwhile, SEC deleted what could have become its first formal definition of “digital asset” from its latest hedge fund rule. The definition which states that a digital asset is “an asset that is issued and/or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called “virtual currencies”, “coins”, and “tokens,” was initially included in the proposed rule. The final rule doesn’t include the term and says that “the Commission and staff are continuing to consider this term and are not adopting ‘digital assets’ as part of this rule at this time.” This decision is definitely a step backwards in creating rulemaking for digital assets. Anne-Marie Kelley, a partner at Mercury Strategies, and a former SEC official, suggested that this was done because “any recognition of digital assets uniqueness as a novel product weakens their litigation stance that digital assets are securities and subject to the SEC securities laws.”

The fight between SEC and Coinbase is quite likely right now and there is a fair chance that SEC might lose it. One of the possible reasons is Gary Gensler’s [careless] statement that SEC doesn’t have the authority to regulate crypto exchanges:

1/ If the SEC follows through on its threat to sue @Coinbase, I believe the SEC will lose.

The SEC's case has a fatal flaw.

And the problem is entirely of @GaryGensler's own making.

Let me explain...
— MetaLawMan (@MetaLawMan) May 3, 2023

☝️

Here you can read more about Gary Gensler’s position as well as about SEC’s and CFTS’s possible roles in regulating the crypto market.

We are looking forward to seeing the SEC’s reply which must appear within next week according to the court’s decision, and to the Coinbase’s further actions.

We will keep you informed - as always. Stay tuned!

UPD: In its response the SEC alleged that Coinbase has no right to mandamus, which orders a government agency to fulfill certain duties. The agency said that “deliberating over the kind of significant changes sought by Coinbase, which could affect both crypto assets and the securities markets more generally, takes time—including, as here, time to weigh whether or not to initiate a rulemaking proceeding about such topics in the first instance. This is particularly true given the Commission’s active regulatory and enforcement agenda in this area.”