Coinbase sues SEC to demand response over rulemaking petition

Category: Blockchain Crypto Regulatory

Cryptocurrency exchange Coinbase has filed a petition in federal court, urging the Securities and Exchange Commission to respond to its demand for more explicit regulations on digital asset securities. Coinbase had initially sent its rulemaking petition to the SEC in July to seek proposed and adopted rules for regulating digital assets.

In an interview with Bloomberg News, Coinbase’s Chief Legal Officer Paul Grewal said that the company has been waiting for an extended period for a response from the SEC. During this time, the SEC has been actively enforcing regulations.

The exchange posed 50 specific questions aimed at obtaining clarity on regulatory treatment. Some of Coinbase’s questions revolve around the SEC’s approach to classifying tokens as securities and matters such as asset custody and trading of crypto asset securities on SEC-regulated exchanges.

Citing the Administrative Procedure Act, the SEC must legally address Coinbase’s petition within a “reasonable” timeframe. The APA outlines government agencies’ procedures when creating and issuing regulations. It also allows the public to challenge regulatory decisions and petition agencies to establish, modify or revoke a rule.

When asked why his company took a jab at the SEC, Grewal emphasized that Coinbase is not seeking to dictate the SEC’s response but rather requesting the court to order the commission to respond as per their legal obligation.

He also said that if the SEC disagrees with the need for new regulations in the crypto space, it should respond to Coinbase’s petition and state its position. This would allow the company to have the opportunity to challenge the SEC’s assessment in court.

Grewal argued that by not responding, the SEC prevents the judiciary from evaluating whether the SEC’s stance is correct, depriving the courts of their authority in the matter.

The lawsuit further escalates tensions between Coinbase and the SEC, following the regulator’s Wells notice last month that it intends to bring enforcement against the exchange. The notification indicated that its staking products were not registered securities.

Taking a stance against regulators

This is not the first time Coinbase and the SEC have been at odds. In 2021, Coinbase also received a Wells notice from the commission over a planned coin-lending product, which the company ultimately decided not to launch. At that time, Coinbase CEO Brian Armstrong publicly criticized the regulator through tweets.

Coinbase’s legal action may impact the regulation of digital assets and the relationship between cryptocurrency exchanges and regulators. After all, the exchange’s challenge comes at a time when U.S. regulatory agencies like the SEC and CFTC are scrutinizing digital asset firms more closely.

In February, cryptocurrency exchange Kraken settled with the SEC over its staking-as-a-service program, which the agency claimed violated securities laws by offering it to investors. Kraken agreed to pay a $30 million fine and stop providing the service to U.S. clients as part of the settlement.

Following the SEC’s action against Kraken related to its staking program, Coinbase’s shares closed down 14 percent. Coinbase has seen a 77 percent increase in its value in 2023 but has experienced a decline of over 80 percent since its initial public offering in 2021.

Coinbase’s upcoming earnings report for the first fiscal quarter of this year, scheduled for May 4, is anticipated to shed light on the state of the digital asset industry. As the only publicly-traded cryptocurrency exchange in the U.S., analysts will closely examine Coinbase’s performance to gauge the impact of recent market trends and retail trader activity on the platform.