US crypto exchange Coinbase has taken legal action against the Securities and Exchange Commission (SEC), alleging that the agency has acted arbitrarily and capriciously in its refusal to adapt rules to clarify oversight of the crypto industry. This comes after Coinbase’s formal rule-making petition was denied by the SEC. In a filing submitted to the US Court of Appeals for the Third Circuit, Coinbase Inc. (COIN) contends that the SEC has disregarded legal requirements in dismissing the company’s request for crypto regulations.
Coinbase sues SEC
According to Coinbase’s lawyers, the securities regulator has acted arbitrarily and capriciously in claiming authority over crypto assets while also refusing to write new rules on how to treat them. In the opening brief to its lawsuit the company argued that the agency oversaw digital assets through its enforcement actions.
The SEC didn’t explain why it won’t write crypto specific regulations when it rejected Coinbase’s petition in December, as per the exchange’s lawyers In a statement when the Coinbase petition was rejected by the SEC, Gary Gensler said the agency had been working on crypto rules – even though they’re not what the industry wants – and that “it is important to maintain commission discretion in setting its own rulemaking priorities.”
Paul Grewal, Coinbase’s legal officer, posted Monday on X that the SEC owes the public an explanation and a chance to weigh in, saying, “if you go back and read the SEC’s perfunctory denial, you’ll be hard pressed to find an actual reason for its inaction.” Hence, the lawsuit.
“The SEC demands that the industry comply with inapplicable, inapt and still-evolving securities-law requirements or else join the many companies now facing enforcement actions – including Coinbase,” the company wrote. “Yet the SEC refuses to conduct the rulemaking needed to set stable standards, to show how it believes compliance with those irrelevant requirements is even possible and to provide a path to do so.”
Coinbase’s epic court fight with the SEC that may eventually shape the way crypto exchanges are treated under US securities law is not directly related to this week’s latest legal challenge, which contends the regulator has failed to regulate crypto properly. This time the SEC accused Coinbase of running an unregistered exchange that lists unregistered crypto securities. Both disputes share the SEC’s unwillingness to formally define what constitutes a crypto security outside of its enforcement actions.
What are the exchange’s claims?
Coinbase wants federal circuit court to dismiss SEC’s previous disapproval and require that SEC commence with new crypto rulemaking or better still substantiate its stand.
SEC has spent reasonable amount of time in courts regarding crypto issues, and their outcomes so far are mixed. They had big losses in their disputes against Ripple as well as Grayscale, but it prevailed in others such as an insider-trading case involving a former Coinbase employee. In that instance a U.S District Court judge presiding over the Western District of Washington ruled that these were unregistered securities.
Over time, however, other disputes like Ripple’s could be appealed and older decisions may be overturned on their way up to potential US Supreme Court review which has all eyes on the industry following every court decision.