Wednesday, March 13, 2024

SEC ‘must’ adopt rules on crypto, Coinbase tells Third Circuit

By Lene Powell, J.D.

The SEC is “pursuing a power grab” over the crypto industry by engaging in enforcement while foregoing rulemaking, crypto giant Coinbase told the Third Circuit. In a new filing, Coinbase argues the SEC's “refusal to engage in rulemaking” is arbitrary and capricious and an abuse of discretion in violation of the Administrative Procedure Act (APA). Coinbase asked the court to vacate the SEC’s denial of petition for rulemaking and direct the SEC to commence rulemaking (Coinbase, Inc. v. SEC, March 11, 2024).

The new filing is the latest in a fierce exchange. Coinbase previously asked the Third Circuit to require the SEC to respond to its 2022 petition for rulemaking. The SEC responded by denying the rulemaking petition. The Third Circuit then dismissed the action as moot, and Coinbase filed the current challenge.

Coinbase’s lawsuit is also parallel to another action involving the parties. In an enforcement action in the Southern District of New York, the SEC has charged Coinbase with registration violations including failure to register as a national securities exchange, broker-dealer, and clearing agency. The SEC contends that the securities laws apply to Coinbase’s conduct, while Coinbase argues they do not.

“No workable framework.” Coinbase argues the SEC has performed an “about-face.” Earlier when the crypto industry was building up, the SEC indicated it had little statutory authority over digital assets and what authority it did have was unclear. Market participants responded by investing heavily in a what Coinbase says is a two-trillion-dollar industry. Then, the SEC pivoted and began a “scorched-earth, nationwide campaign” of enforcement.

Now, says Coinbase, it is caught in a catch-22: the SEC tells digital asset firms to “come in and register” under threat of enforcement suits, but registration is neither required nor possible under existing rules, which were designed decades ago for legacy financial assets and businesses.

Coinbase says it filed its petition for rulemaking because rulemaking is the only way for the agency to draw clear lines identifying them, to provide fair notice, and to create a workable regulatory framework that makes compliance with the securities laws possible.

Rulemaking needed. Coinbase is challenging the SEC’s denial of Coinbase’s petition for rulemaking. While the SEC communicated its decision in a letter, Coinbase calls the decision an “order.”

Coinbase argues:
  • The SEC must engage in rulemaking because it has adopted sweeping new views of the securities laws and existing laws do not work for digital assets;
  • The SEC cannot rationally regulate digital assets through ad hoc district court enforcement actions;
  • The SEC’s refusal to commence rulemaking should be vacated because the SEC offered no rational explanation for its inaction on Coinbase’s petition for rulemaking.
Remedies sought. Coinbase asked the court to grant the petition for review, vacate the SEC’s order, and direct the agency to begin a “long-overdue” rulemaking process.

This is case No. 23-3202.