Coinbase urges appeals court to instruct SEC to establish regulatory framework for cryptocurrency
Coinbase argued on Monday that an appeals court should instruct the Securities and Exchange Commission to commence a “long-overdue rulemaking process.” The company claimed in its opening brief filed in the Court of Appeals for the Third Circuit that the SEC violated the Administrative Procedures Act by failing to engage in rulemaking and provide a detailed explanation for denying Coinbase’s rulemaking petition. Coinbase emphasized that if the SEC wants to extend the existing securities regime to digital assets, it must do so through prospective rulemaking, even though it lacks the statutory authority to do so without congressional authorization.
The ongoing dispute between Coinbase and the SEC over the necessity for rulemaking dates back to July 2022 when Coinbase initially requested the SEC to issue formal rules for the crypto industry. While the SEC has not introduced specific regulations for crypto, it has proposed rules that apply to the industry, such as revisiting custody rules for registered investment advisors. Despite Coinbase’s efforts to force a definitive response from the SEC through litigation filed in April 2023, the SEC denied the request for new rules, citing existing regulations that already apply to crypto.
The Alleged APA Violation by the SEC
In a lengthy 78-page brief, Coinbase argued that the SEC has focused more on enforcement actions against crypto entities rather than establishing industry regulations. Coinbase expressed concerns about the SEC asserting new authority over digital assets without formal rulemaking, which it believes is necessary to test the SEC’s jurisdiction over the industry. Coinbase highlighted the importance of rulemaking for providing fair notice and preserving the industry’s reliance on prior SEC positions.
Challenges of Current Securities Rules in Regulating Digital Assets
Coinbase pointed out in its brief that existing securities rules are ill-suited for regulating digital assets due to various reasons, including challenges in registration and disclosure requirements. The company argued that current rules would restrict exchanges to only offering digital asset transactions, potentially excluding commodities like Bitcoin and Ethereum. Additionally, Coinbase criticized the SEC for lacking a thorough explanation for denying the rulemaking petition.
Coinbase is also facing a separate lawsuit from the SEC for allegedly operating as an unregistered exchange.
The case will progress with the SEC filing an opposing brief in April, followed by Coinbase’s reply. Oral arguments, if scheduled by the third circuit, are anticipated for late summer or early fall, with a final decision expected by the end of 2024 or in 2025.
Updated at 5:55 p.m. ET to include details throughout
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