Coinbase's Petition for Crypto Rulemaking

In July 2022, Coinbase made a significant move. The cryptocurrency exchange asked the United States Securities and Exchange Commission (SEC) to propose and adopt rules for securities offered and traded digitally natively. This request included a crucial clarification on which crypto assets are considered securities.

However, in late 2023, the SEC denied Coinbase's request. This denial prompted Coinbase to seek intervention from the United States Court of Appeals for the Third Circuit. The firm requested the court to compel the SEC to provide a substantive answer to its petition.

The Court's Scrutiny

On September 23, D.C., Third Circuit panel members examined the SEC's explanation for denying Coinbase's petition. The judges suggested that the SEC's reasoning was lacking in substance. Judge Thomas Ambro remarked that while the SEC isn't required to provide an extensive explanation, the record must contain something tangible.

"There's an argument here that this is pretty darn close to vacuous," Judge Ambro said regarding the SEC's denial order, according to a report from Law360.

In December, the SEC issued a two-page denial of Coinbase's petition for crypto rulemaking. Coinbase argued that this brief denial was insufficient and arbitrary, especially considering the ongoing enforcement actions against crypto companies.

Eugene Scalia, counsel for Coinbase, argued that the SEC failed to provide any explanation for rejecting Coinbase's demonstration that current SEC rules make it unworkable for digital asset companies to register and for digital assets to function as designed.

Lack of Clear Guidance

Coinbase's chief legal officer, Paul Grewal, expressed frustration in a post on X on September 24. He stated that the SEC refuses to explain its barebones denial reasonably while continuing an arbitrary enforcement campaign against the crypto industry.

The judges also expressed concern about the need for clear guidance for the crypto industry. They questioned how firms can comply with existing rules that may not fit the nature of crypto assets and decentralized protocols.

Judge Ambro added that he read the paragraph in the denial relating to the brief reasoning but did not understand why the SEC was denying rulemaking. U.S. Circuit Judge Stephanos Bibas echoed this sentiment. He noted that the regulator's repeated enforcement actions indicate that the SEC has the time and attention to spend on rulemaking.

SEC's Defense

The SEC defended its position by stating that ongoing undertakings and other priorities influenced its decision to deny rulemaking at this time. This defense comes amid increased scrutiny and legal battles.

The SEC charged Coinbase in June 2023 for operating as an unregistered securities exchange, broker, and clearing agency. This latest development could be another minor victory in the ongoing battle between the crypto industry and the securities regulator.